The markets met the past quarter with more sanguinity. We had a dip in February, but the markets ended the quarter mostly flat. There are many positive economic signals: job numbers continue to improve, economic growth was revised upward for the previous quarter, the EU hit its highest consumer confidence in half a decade, and housing numbers are on track. For the most part, the market brushed aside events that at other times might cause significant downward movement, like the Russian invasion of Crimea. Many Wall Street analysts are predicting a multi-year spell of lowered stock volatility. That may happen, but it’s certainly not something one can predict with any accuracy. So, thinking about all those professional investors that are basing their strategies on those predictions, I wanted to touch on two of the advantages independent investors hold over Wall Street: the freedom to admit uncertainty and the absence of pressure to react to every market event. Read more →
I first read about the forefather of value investing, Benjamin Graham, in the late 1990s. In the investing world, value investors have never been in the majority (or even the plurality), but Graham had then, and still has, a strong following. I was interested that a historical figure would have so much influence in modern investing. In a world of computers, instant data, and new economic conditions, I wondered whether Graham’s advice was still applicable. After years of research I came to believe Graham’s teachings were highly valuable, even if some of his formulas were now outdated. Graham’s principles became the foundation for my investment philosophy. Read more →
As a general rule, I avoid companies that pay large dividends. I do this because in the best case, it is a sign from management that investing its cash back in the business will not yield a solid rate of return. That is, management would rather give the cash to shareholders than invest it to grow the business. In the worst case, management will raise dividends even when that cash could yield a good return on reinvestment, or is needed to pay down debt. Read more →
My approach to investing is founded on buying businesses for the long-term, not trading stocks for the short-term. At times of market volatility (for example, the start of this year), this might seem an illogical way to look at a stocks. The common thought is that these price swings have to mean something. Commentators on CNBC offer a trade of the day five days a week. Other commentators discuss the emerging technical patterns that will dictate price. There is plenty of pressure on investors to trade often and try to catch the market, or a stock, at the perfect time. The key concept to remember, however, is that most of the time short-term price movement doesn’t mean anything. It’s not a rational response to macroeconomic events or microeconomic news. It is what statisticians call noise. Try to outsmart the market’s short-term reactions and the market will leave you behind. Read more →
I recently ran across a couple graphs created by deep-value investor Seth Klarman. He specializes in buying companies that have major problems, but are underpriced, even accounting for the issues facing the company. Many investors feel uncomfortable buying and holding companies that face business problems, have poor future growth prospects, or demonstrate downward price trends. Read more →
Recently, I read a fact that most would find surprising. According to Bloomberg, the 50 stocks with the lowest Wall Street analyst ratings at the beginning of 2012 (the companies Wall Street expected the worst from), outperformed the S&P 500 by seven percentage points in 2012.
That isn’t an unusual phenomenon. Looking at this year yields similar results. Companies with the most Wall Street sell ratings in January outperformed the market by a median 15 percentage points. Those with the most buy ratings underperformed by more than seven percentage points. An investor would do better to buy when Wall Street says sell.
There are two lessons here. Read more →
Economics and market behavior are chaotic and often poorly understood by a wide range of interested parties. One such group is the financial media, where there is a pantheon of commonly used ideas and phrases that do not translate to actual events or rational decision making. Here are a few poorly conceived phrases I read too often.
“Earnings missed estimates.”
I better way to look at this might be: estimates miss earnings. When the weather forecast is wrong, it is rare to hear people say “the weather missed estimates”. We just say the forecast was wrong. Finance is the only industry where forecasters blame their poor forecasting skills on reality. Read more →
The economy is so complex is it literally unknowable until you can look at it in the distant past. On TV, you’ll see commercials for mutual funds that say their managers understand economic complexity and are able to see how a rice shortage in India will mean greater demand for power line transmission in China. That’s a great marketing slogan, but sadly it’s not possible. There are trillions of moving parts in the economy reacting to each other every second, often in conflict to past reactions or without historical precedent. You’re better off paying attention to investing great Charlie Munger, who said: “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.” Read more →
Use Scientific Thinking
The most important skill for any investor to develop is temperament. No amount of research, know-how, data, or analytical capability can overcome the tendency of investors to act on emotion before reason. This is part of the human condition. Read more →
Last quarter was defined by calm and optimism in the markets. For most of this year market volatility has been low and value opportunities for new investments were limited. That may change over the next month. A government shutdown started last night and markets will react with an increase in volatility. I hope to take advantage of any panic that ensues by finding some excellent value stocks trading with significant margin of safety. We’ll wait, however, until the debt ceiling showdown passes in late October. Read more →