When markets are tumbling, it’s time to get excited about stocks. This is often talked about, but rarely practiced. J. Paul Getty once said the key to getting rich is simple: “Buy when everyone else is selling and hold when everyone else is buying”.
For the value investing community, Buffett’s famous “Be greedy when others are fearful” basically is the same gist. Commonly referenced and preached, but far less often practiced.
I am lucky to have a great client base at Saber Capital. It is very important to have an investor base who understands how you are trying to create long term results. For individual investors, or small fund managers like myself, it’s important to capitalize on what is in my opinion the best advantage we have—the ability to look out long term. The more sophisticated people call this long-term idea “time arbitrage”. The ability to have a longer term time horizon than the vast majority of market participants is a widely talked about attribute by most fund managers, but I think it is still underrated.
Many market participants willingly admit that over time, the business in question will be making more money and the stock price will likely be much higher years down the road, but yet they are selling or avoiding the stock now because of an expected poor quarter or some other short term problem, or worse yet—for reasons that have nothing to do with the company at all but for general market or macroeconomic worries.
[drizzle]Regarding one well-followed company I am currently looking at, I heard one analyst downgrade the company for fears about the current quarter while admitting that the company has an extremely bright long-term future—his recommendation is to sell now as near term “pressure” will likely create a “better entry point”. Possibly, but not sure I have any edge in picking “entry points” or being able to tell when “pressure” has alleviated (other than after it’s already too late and reflected in the stock price).
As Mohnish Pabrai said in his book:
The typical hammer-wielding Wall Street analyst is fixated on the next few quarters, not the next half century when trying to figure out any given company. No Wall Street analyst’s mental model of Coke in 1988 was comprised of the latticework that Munger and Buffett fixated upon.
I’ve always felt that this is one of the reasons why large cap stocks often get significantly mispriced. The average large cap stock’s 52 week high is around 50% higher than its 52 week low. The reason for these large fluctuations in huge well-followed companies is partly due to the changing moods of the market, but also partly due to the very short-term focused views that the majority of market participants have. Every analyst talks about Google’s next quarter and has a model for earnings and other quarterly metrics. Very few analysts consider that no 22-year old engineer would rather work at Yahoo or Microsoft over Google. These intangible things matter, but they don’t show up in quarterly results. It’s why a stock like Google can trade at $500 one year and nearly $800 the next, a difference of around $200 billion of market value.
This is the time to be getting more excited, and this is the time to be taking advantage of marked down prices. Good companies are much cheaper than they were just two weeks ago. It’s like a post-Christmas sale.
The key, as Rudyard Kipling said, is keeping your head when all about you are losing theirs.
So in response to a number of readers who asked me my opinion on the market (I have no opinion by the way), I’ll list some “back to basics” things that might be helpful to review. Think of it as weekend reading list to get your frame of mind focused on thinking about businesses and valuations next week, and not economic indicators or where the S&P will find “support”.
Great investors talk a lot about long-term thinking. So do some of the most successful businesses of all time. Jeff Bezos doesn’t care about quarterly results now, nor did he in 1997 when he wrote the first Amazon shareholder letter:
“We will continue to make investment decisions in light of long-term market leadership considerations rather than short-term profitability considerations or short-term Wall Street reactions.”
And my favorite bullet point from this letter:
“When forced to choose between optimizing the appearance of our GAAP accounting and maximizing the present value of future cash flows, we’ll take the cash flows.”
By the way, Amazon did $148 million in sales in 1997. This year they’ll do $100 billion.
Take a look at the Google IPO Prospectus from 2004. The original shareholder letter that Page and Brin wrote contain a few great concepts:
Many people will attribute things other than “long-term view” to Google’s and Amazon’s successes. Certainly a long-term mindset wasn’t a sufficient condition for their success, but I do think it was necessary. And I think it’s interesting that these two firms were the ones who—well before they were entrenched companies with huge moats that we now know from hindsight—actually talked about this from the very beginning, before they achieved the dominance that they did. There were other search engines and other ecommerce retailers, and certainly there were many reasons why these two firms squashed the competition, but focusing on long-term results certainly helped them get there.
It behooves investors—just like it behooves corporate managers—to think past the next few quarters.
Steve Jobs—Go For a Walk
Walking helps clarify thinking. It can produce good ideas. If you don’t like to walk, sit in a room and think for a while. It worked for Buffett. It worked for Archimedes. Great ideas don’t usually come from a schedule like this one.
Steve Jobs talked a lot about “zooming out”. He would go for walks around Apple’s campus and get deep into thought about an idea.
Buffett’s 2008 NY Times Op-Ed Piece
I remember when Buffett wrote this piece, and I remember how many people laughed at him then. I also remember all the ridicule he received as the market continued lower for the next few months. A year later it was 30% higher, and five years later (the time frame he mentioned in the article) the market had tripled. I no longer hear anyone laughing at him.
“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.
“Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month