2024 Q3 Commentary
By Nick Fisher, Portfolio Manager
Uncertainty is often a given in financial markets. Markets abhor uncertainty. As a result, volatility shows itself from time to time. We have on a occasion benefited from this volatility, in fact we pride ourselves on this ability. As we position ourselves for 2025 and beyond, let's remember that there can be many reasons for stock market turbulence. Frequently, we see it is unjustified and does not reflect the risks associated with the businesses we own. It's our job to understand the difference.
On August 5th, the Japanese stock market declined by 12% in a single day and the next day it increased by 10%. There is no possible way that Japanese businesses were worth 12% less on one day and 10% more the following day. Academics and the wall street money machine would have us believe that “markets are efficient.” The prospects of this theory are as absurd today as when Benjamin Graham wrote his seminal work on value investing, The Intelligent Investor.
2024 marks the 75th anniversary of this prescriptive investment wisdom by the late Benjamin Graham.
"The stock investor is neither right or wrong because others agreed with them; they are right because the facts and analysis are right."
- Benjamin Graham, The Intelligent Investor
Many of the greatest investors have gained valuable direction from the most important points in chapters 8 and 20 from Graham’s book. The four main ideas may sound familiar, as we have alluded to them many times. In light of the market events in early August, they can be informative and provide a framework for the inexplicable volatility.
Stocks are businesses. The movement of the stock is much less important than the performance of the business over the course of years to come. Stocks are not merely pieces of paper that increase or decrease in price.
There is a difference between investing and speculating. An investor “…puts original, careful, thorough, and thoughtful research into establishing the value of a business based on what it will do in the future.” A speculator is more interested in what other investors are going to do in the short run…to influence the stock price.
Mr. Market is like an overly emotional neighbor who everyday offers to buy a business from investors at a price he chooses. The investor can choose to take the price or ignore the price. Most of the time an investor should ignore the price.
Mr. Market will often offer a rational price, but just like on August 5th, the price Mr. Market offers can be based on an overly fearful (in this case) or excessively exuberant Mr. Market.
Benjamin Graham summed of these points concisely in perhaps the most important paragraph ever written for an intelligent investor:
The true investor is scarcely ever forced to sell his shares and at all other times is free to disregard the current price quotation. Investors need to pay attention and act upon it only to the extent that it suits their book and no more. Thus, the investor that permits themselves to be stampeded or unduly worried by unjustified market declines in their holdings is perversely transforming their basic advantage into a basic disadvantage. That person would be better off if their stocks had no market quotation at all, for they would then be spared the mental anguish caused by other persons mistakes of judgement.
Are you an investor or speculator? Neither is right or wrong, but it’s important to not fool yourself into believing you are one over the other. The true investor is not a slave to market prices. Market prices are there to serve the investor in the acquisition or disposition of quality, long-term businesses and assets [hat tip to Grant Williams for his thoughtful discussion on the topic].
It’s perhaps most central to acknowledge the goal of investing: To achieve the greatest return, for the least amount of risk for the longest period of time in order to achieve a desired outcome.
Nobody should have the goal of merely “beating the market.” It completely ignores the vicissitudes of Mr. Market, the emotional volatility of market fluctuations, and the risks of following the "narrative" du jour, in favor of the economic realities inherent in owning a portfolio of valuable businesses.
We will continue to acquire businesses and unique assets when prices are reasonable and sell businesses and/or accumulate cash when prices are dear. In doing this, we can ensure that we will overcome the emotions of Mr. Market, stay in the game, and achieve a desirable return over the longest period of time.
Thank you for entrusting us with growing, preserving and protecting your hard-earned savings.
