Paul Samuelson won the Nobel Prize in Economics and also wrote the introductory textbook that got me hooked on the subject. Here’s what he had to say about the stock market: “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take your money and go to Las Vegas”. We couldn’t agree more, and the market action over the past few months has once again confirmed our view that patience is one of the primary virtues of the capable investor.
Stocks are in some ways like fashion apparel. What is trendy one season is out of favour the next. Since the stock market operates like a giant, continuous opinion poll, out of fashion stocks get sold off and trendy ones get purchased at inflated prices. Here are some recent examples:
Apple, until recently the most valuable company in the world, was everyone’s darling last year, and doubled in value from the fall of 2011 to the fall of 2012. The company could do no wrong and was a “top pick” for many brokers and advisors. Now Apple is out of favour, and the stock has dropped by about a third from its peak. Lost in the hype and uproar is the fact that the company is very little changed from where it was a year ago, is if anything, more profitable than it was then, and has more cash in the bank. Trading at less than 7 times expected earnings (after taking cash into consideration) Apple is amazingly cheap. At some time, who knows when, the stock will be back in favour. In the meantime the dividend yield of 2.3% is more than twice what investors get from holding money in the bank.
SNC Lavalin, the giant multi-national engineering and consulting company was riding high in the summer of 2011, with its stock hitting new levels close to $60. Then came allegations of nefarious dealings in North Africa. In spite of a huge order backlog of $10 billion, significant concession properties such as 17% of Ontario’s highway 407 and continuously profitable operations, the stock lost about a third of its value in a few weeks. Now the stock is back in favour, and rose more than 10% in January alone, leading to an increase of more than 25% from its low. As we commented last year, those who sold in haste will regret at leisure.
Buying the shares of good companies that have sold off to prices that do not reflect their true worth is how the value investor makes money. Holding the shares of good companies that have fallen out of favour is the obvious corollary. Examples of the kind noted above are numerous. The smart investor eschews excitement, exercises patience, and prospers over time.
Disclosure: Author and clients of Baskin Financial own shares in Apple and SNC Lavalin