Market Crash: Long-Term thinking and back to the basics
By John Huber
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…).
Here is a link to the piece.
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
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