股市小書生
價值投資
Long-term Thinking and Back to Basics
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.
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”.
Long-Term Thinking
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 — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”
“Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.”
It’s such a simple concept, and the article was written for everyday Americans, yet the advice is really practical for all investors.
Buffett’s You Pay a Very High Price in the Stock Market for a Cheery Consensus
This piece was originally written by Buffett in Forbes in 1978.
“A second argument is made that there are just too many question marks about the near future; wouldn’t it be better to wait until things clear up a bit? You know the prose: “Maintain buying reserves until current uncertainties are resolved,” etc. Before reaching for that crutch, face up to two unpleasant facts: The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.”
Superinvestors of Graham & Doddsville
This is always an interesting piece to review once in a while. Check out the track records of some of Buffett’s friends. These guys primarily operating under the same philosophy of buying assets for less than their true value, but they used different tactics to implement their approaches (Schloss bought bargains and was diversified, Lou Simpson bought businesses that could compound over time, Munger did some of both, so did Buffett, etc…).
I don’t think any of these guys paid much attention to the S&P. They didn’t beat the market every year, and they all had some bad years, but over time their focus on value and not markets paid off.
Zoom Out
Go for a walk. Turn off CNBC, stop watching “Markets in Turmoil” specials, stop reading twitter, and pick up a book or go for a walk. “Zoom out” as Jobs said. And remember that most of the great wealth was made not by using stop losses or trading in and out (granted-there are some great traders). But most of the real wealth was built by buying good assets, particularly when they are on sale.
Also, by “zooming out”, you’ll notice the market hasn’t fallen that much. 10% corrections throughout history have occurred every 18 months or so. This isn’t abnormal. 20% corrections occur about once every 4 or 5 years. Another 10% decline from here would also not be abnormal.
Regardless of what happens, low stock prices lead to opportunities, and opportunities are becoming more prevalent, which is a very exciting development.
John
The rules Buffet plays by are not the same rules you or I play by, and I would also suggest that Buffett’s definition of being ‘greedy when others are fearful’ is vastly different from how the majority of other investors think of fear in the market. A 10-20% correction is not fear, at least not to me. The mere fact that two people can disagree on what ‘fear’ is goes some way to prove how hard it is to quantify such a thing and it therefore follows that if definitions vary so widely it shouldn’t really be used as an excuse to start buying.
When Buffet was buying in 08/09, he entered into sectors that were very distressed and picked up companies that nobody wanted to be around. Some of those companies were down by up to 50%-70% and more, not a paltry 10-20% as I seem to see many talking about. Part of the reason why he was so successful was because he had a significant information advantage. Had you taken his advice and acted immediately on it in October 08 you could have bought BAC, or Citigroup, or several others, and still been sitting on a significant unrealised loss today. How many value investors do you know of that has a direct line to people sitting in the White House? Buffet would have known what was going on behind the scenes from all the TARP bailouts and the structure of those before the bill had been signed into law. Perhaps he may have even be called to consult on such a draft such is the esteem with which he is held – certainly it is well known that he has a cosy with the then treasury secretary Hank Paulson and is also known for communicating with Paulson at that time.
One other thing I really don’t understand is the idea that value investors feel the need to shun any kind of timing approach. When you buy has a material impact on what price you pay. If a value investor truly believes that timing is irrelevant, then why bother sitting on any cash at all? This is an idea put forward by the value community which doesn’t stack up to how the value investing community actually behaves. Instead they will phrase holding spare cash as a ‘source for opportunity’, and yet by holding cash you are expressly looking to time better entries. For the record I am not for one moment agreeing with your pundit on selling because the next quarter looks tough.
I think people generally are quick to use Buffett’s wisdom to justify folly. I’m not suggesting you are doing this btw.
I agree with you completely about having longer term perspective btw.
Hi Ben, Thanks for the comment. Some interesting points there. I would say a couple things though… first, I don’t think Buffett ever made a stock pick recommendation. He was simply saying that now (late 2008) was a great time to be buying American stocks. And he was certainly right about that. The only company I ever remember him making any sort of public statement on is Wells Fargo. He said he would put his entire net worth into WFC when it was trading at 7. And he was certainly right there too. He never said anything about C or BAC in 2009. He did buy BAC in 2011 and investors would have done pretty well following him into that one, although not as well as if they followed him into WFC in 2009.
Anyhow, just some points there on stock picks. I actually think you could have done very well just cloning Buffett, although it was certainly possible to do better given most of us are much smaller.
As for the White House direct line, I don’t know that that is actually true, but let’s assume he could call Bush or Obama. I’m not sure those guys are great stock pickers, and I’m not sure Buffett needed their help. He wrote a letter to Paulson (Treasury Secretary), and I know what you’re trying to say… certainly Buffett’s name provides him with a competitive advantage.
That said, I often hear people dismiss Buffett’s success due to his connections. There are a couple problems with this line of thought: first off, Buffett got his connections because of his incredible success as an investor. His investment success didn’t come from his connections. Without the investment record, there would be no “direct line” to anyone of importance. Secondly, his numbers now–even with those connections–are nowhere near the numbers that he produced when he was sitting in his pajamas flipping through Moody’s manuals. He did 30% a year in his partnership, and 50% per year in the early 1950’s with his own money buying and selling cheap stocks. The record he achieved in the early decades earned him the reputation that he can now use to Berkshire’s advantage.
And lastly, I understand that many people find Buffett disingenuous sometimes when he gives advice. But I believe his advice is sound. In fact, almost every time he’s publicly issued advice on either stock market valuations or general recommendations, it would have paid to heed it.
As for cash/timing… that’s an interesting point. I do think cash can be held from time to time though, and I actually still have a fair amount of cash. I know a lot of value investors who hold cash at times. I’m not sure about timing though. In a way, cash tends to build when bargains are scarce, which might often coincide with high stock prices, but cash levels usually are based on opportunities for me, not necessarily where the S&P is or where I think it might be going. Not sure how other investors view this. I know there are some great timers out there (Druckenmiller, Tudor Jones, Soros, etc…), but I think those guys are a very rare breed. I personally don’t think I have any skillset to attempt trying to time markets (nor do I have a desire to operate that way. Investing in such a way would be stressful to me, but I suppose others might be able to succeed at it. To each their own…)
Anyhow, good comment, and thanks for reading Ben.
Hi John,
Thanks for the reply. I agree Buffett’s investing advice by and large is well intended. I think people have a problem with his advice on taxes, where he has been able to defer (and other things besides) which have worked to his long term performance advantage – not for this blog however. Buffett in my view is still the best ever investor irrespective of his tricks, and he is very savy in terms of the marco side of things to.
There is no doubt an experience stock picker will steer clear of the mistakes above – like yourself. Buffett didn’t make recommendations in October of course, yet he did buy BAC in 2011 (warrants) so he obviously felt that BAC was a place where he could put his money and the timing of that purchase was crucial.
His article in 2008 is now famous, for all the right reasons, but as you mentioned in your previous article about Peter Lynch, too often it is used incorrectly and as an excuse for folly.
Cheers
B
The rules Buffet plays by are not the same rules you or I play by, and I would also suggest that Buffett’s definition of being ‘greedy when others are fearful’ is vastly different from how the majority of other investors think of fear in the market. A 10-20% correction is not fear, at least not to me. The mere fact that two people can disagree on what ‘fear’ is goes some way to prove how hard it is to quantify such a thing and it therefore follows that if definitions vary so widely it shouldn’t really be used as an excuse to start buying.
When Buffet was buying in 08/09, he entered into sectors that were very distressed and picked up companies that nobody wanted to be around. Some of those companies were down by up to 50%-70% and more, not a paltry 10-20% as I seem to see many talking about. Part of the reason why he was so successful was because he had a significant information advantage. Had you taken his advice and acted immediately on it in October 08 you could have bought BAC, or Citigroup, or several others, and still been sitting on a significant unrealised loss today. How many value investors do you know of that has a direct line to people sitting in the White House? Buffet would have known what was going on behind the scenes from all the TARP bailouts and the structure of those before the bill had been signed into law. Perhaps he may have even be called to consult on such a draft such is the esteem with which he is held – certainly it is well known that he has a cosy with the then treasury secretary Hank Paulson and is also known for communicating with Paulson at that time.
One other thing I really don’t understand is the idea that value investors feel the need to shun any kind of timing approach. When you buy has a material impact on what price you pay. If a value investor truly believes that timing is irrelevant, then why bother sitting on any cash at all? This is an idea put forward by the value community which doesn’t stack up to how the value investing community actually behaves. Instead they will phrase holding spare cash as a ‘source for opportunity’, and yet by holding cash you are expressly looking to time better entries. For the record I am not for one moment agreeing with your pundit on selling because the next quarter looks tough.
I think people generally are quick to use Buffett’s wisdom to justify folly. I’m not suggesting you are doing this btw.
I agree with you completely about having longer term perspective btw.