Don’t Just Do Something, Stand There!

Don’t Just Do Something, Stand There!

Over a five-year period, the price of a stock will largely track the fundamentals of the company rather than its quarterly economic reports. We live in a world in which information on virtually anything is no further away than your smartphone.

With the ability to access information and the media’s reporting on the stock market as though it were a sports event, investors lose track of the long term and focus too much on the short term.

Don’t let that happen to you. Even the world’s greatest investors underperform in the short term from time to time… it’s all part of the “game.”

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Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy, have produced a 12.6% annualised return over the past 26 years. The funds added 7.7% overall in the second half of 2022, outperforming the 3.4% return for Read More

Other than Bill Miller of Legg Mason and his amazing 15-year record of beating the S&P 500 each and every year, every great investor has underperformed the S&P 500 index over short periods of time.

In his book The Warren Buffett Portfolio: Mastering the Power of the Focus Investment Strategy Robert Hagstrom examines the record of managers who had excellent long-term performance but had periods of disappointment over the short term.

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The investors he talks about besides Buffett are John Maynard Keynes (the famous British economist), Charles Munger (vice chairman of Berkshire Hathaway), Bill Ruane (Sequoia Fund) and Lou Simpson (co-chairman of GEICO Insurance).

Don’t Just Do Something, Stand There!

A year to forget

The past year was a very difficult one for several great investors that have excellent long term performance:


In fact, several of them are down an additional 10% over the past month.

If value investing, or any approach for that matter worked every single year, then everyone would follow it…and sooner or later it will cease working. The reason value investing doesn’t work every year, is an advantage to one that follows it…and here’s why.

Investors are very fickle and switch investment approaches as often as they change theirs socks.

People like to stay with with winners, and if something isn’t winning right now, it gets tossed into the junk heap.  Periods of disappointment are good for any approach because it weeds out the truly committed from the truly fickle.

When many investors fall out of the value investing approach, and abandon stocks that are selling below their intrinsic value–eventually the stock price catches up with the intrinsic value of the company.

When these stocks begin to rise, those same investors that changed their approach to find something better in greener pastures…flock back to value stocks–and the cycle begins again.

In other words…for any approach to work over the long term, it has to disappoint over the short term.

What to do next?

So…how should you react when one or several of your holdings fall in price?

Charlie Munger was asked that question in 2009 after Berkshire Hathaway’s stock price was off by 50%. He was asked, how concerned was he by the drop in the stock price? His response:

“Zero.  This is the third time Warren and I have seen our holdings in Berkshire Hathway go down, top tick to bottom tick, by 50%.  I think it’s in the nature of long term shareholding of the normal vicissitudes, of worldly outcomes, of markets that the long-term holder has his quoted value of his stocks go down by say 50%.  In fact you can argue that if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder and you deserve the mediocre result you’re going to get compared to the people who do have the temperament, who can be more philosophical about these market fluctuations.”

Get The Full Series in PDF

Get the entire 10-part series on Charlie Munger in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

The best advice I can give you is to stay focused on why you invested in a stock.

If you are not prepared to hold it for at least two years, you shouldn’t buy it. Short-term gyrations in the market are there to help you, since they allow you to buy great companies at even better prices.

Don’t let the short term knock you out of a position. Do your research, invest in a great company selling at an attractive price and then, when you get your monthly brokerage statement, don’t open your mail!

Let the company’s fundamentals tell you the real story of where the stock will go over the long term. Have the patience to stick with a good company when the waters are choppy.

Over the past few months several of our selections in the portfolio have not done well at all. Although all of our selections were added to the portfolio when the company was financially strong and the stock was trading at bargain price…Mr. Market wasn’t interested.

While their stock prices have declined, the fundamentals of most of the stocks we added continue to be strong. Mr. Market is currently in a panic over China, the decline in crude oil, a possible recession, and whatever else he could think of.

Don’t let Mr. Market separate you from a great company simply because the price went down. The biggest factor holding many investors back from achieving great results is not the company, the stock market or the media – it is they themselves.

In his more than 30 years of recommending stocks, Charles has knocked the cover off the ball, and has compiled an amazing record of success. He is the editor of <a href=""><i>Hidden Values Alert</i></a> and the <a href=""><i>Inevitable Wealth Portfolio</i></a> newsletters. <i>Hidden Values Alert</i> has been named one of <b>’s 10 Best Advisors from October 2007 to January 2015</b>…a period that included the Financial Crisis of 2008 and the subsequent bull market that began March 2009.   While many gurus boast of astronomical rates of returns over very short time spans, their claims don’t stand up to scrutiny. Instead, their “returns,” when reviewed by an independent third party, melt away faster than ice cream on a hot summer day. The returns that Charles has racked up are certified by Hulbert Financial Digest – the fiercely independent rating service that tracks the performance of financial newsletters. Charles is also the author of the highly acclaimed book, <a href=""><i>Getting Started in Value Investing</i></a> (Wiley). He also writes a blog on investing <a href="">Insider Wealth Alert.</a>
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