2600 Tenth Street, Suite 607 • Berkeley, CA  94710 • (510) 368-5870 • info@libertyinvesting.com

Niehaus Liberty Investing, LLC Fee-Only Intelligent Investing

March 31, 2011


The past quarter was certainly not without some turbulence: oil prices soared at times, dictatorships fell, and a terrible earthquake and nuclear disaster caused untold suffering and spooked the market.  Knowing when to react to such events (or more precisely, when not to react), is one of the most important aspects of my work.  Instead of trying to determine how the market will react to a particular event, I keep my focus on the fundamentals of the companies I follow.  Will the earthquake shutdown a particular factory for a significant period of time?  Will a regime change end a company’s access to customers or resources?  If the answer is no to these types of questions, then we ride out the turbulence in the market and come out on the other side in a better position than those that sold on the downswing.  Market movement remains unpredictable, and investors often make the mistake of making decisions based on chaotic or incomplete data.  It is important to focus on ascertainable information to get the best results.      


We can see a classic example of the perils of drawing conclusions from chaotic or incomplete data when we look at those that trade solely on price movement in the stock market.  The stock market is an auction.  But unlike eBay and foreclosure auctions, stock markets price their wares based on what they’ll be worth in the future.  After all, that is a company’s worth, its future cash flow valued in today’s dollars.  In reality, though, many investors pay little attention to a company’s prospects, products, management team, or strategy, let alone its future cash flow. They care about hourly trading patterns, trend lines, and short-term blips.  In fact, many day traders know only the tickers of the stocks they trade and not the names of the companies.  


High-frequency, rapid computer trading now accounts for about 75% of daily volume in the U.S. markets.  There have been numerous studies that show that this sort of trading leads to much poorer performance than long-term investing. Despite evidence that this approach is flawed, it maintains popularity, I believe, for the same reasons people make macroeconomic predictions: it offers people the feeling that they’ve overcome the inherent short-term randomness in the market.  I prefer to accept that randomness, and focus my investing energy on areas that are actually quite clear.  I will continue to invest in businesses that produce real cash flow, show other signs of fundamental strength, and that the market undervalues.  If all those day-traders help us get the best price for that future cash flow, even better.


As always, I’m available to answer any questions you might have.  


Regards,


Aram Durphy