Investing is the idea of buying a security or an asset, that on the basis of fundamental research, allows you to believe that in time the security or asset will be worth more than what you paid for it in the first place. The securities that we are buying are fractional shares of actual businesses, they are not just pieces of paper. Just like any business, the actual intrinsic value usually changes gradually over time. Yet because stocks change every business day, stock prices change each day and it is nearly impossible to tell why they move one way or the other in the short-term. The human brain is able to respond to a tremendous amount of stimuli. It is natural to look regularly at prices to see what you are “worth” at any given moment, but the problem with that mentality is that it will lead to bad decision making. Unless you are in need of funds within the next year or so, it is best to take a longer-term outlook in investments. This allows businesses to create value and for their stock prices to converge with intrinsic value. Think about how many different “crises” we have been through in the last 5 years that have disrupted markets. Ultimately when the volatility fades, it is the business values that matter.
So far in 2015, the best performing stocks have been the most expensive glamor stocks such as Facebook, Amazon and Netflix. These companies all trade at over 100 times real earnings and engage in very aggressive accounting tactics. That has not prevented them from moving up, but it does make them risky stocks because of the disconnect between price and intrinsic value. The companies will have to execute absolutely perfectly to warrant current valuations. Obviously funds overweight these types of stocks are going to be outperformers and they are heavy components in both the S&P 500 and the Nasdaq. In 2000 tech stocks were the rage and if you weren’t heavy in those sectors you underperformed, despite the fact that just about everybody knew they were drastically overvalued. From peak to trough, the Nasdaq dropped about 75% over the following 3 years. Chasing performance is a loser’s game and always have been.
Many of the leading stocks in 2014 have been lagging stocks this year. Market participants that chase performance are often those that go into gold when it was at $1,600 an ounce and in just about every other commercial on TV, or that piled into real estate investments in 2007 when housing prices seemed like they would never go down. When we started T&T Capital Management, we made a few promises. One was that we would always deal honestly with you. Secondly we would always stay true to our deep value philosophy and wouldn’t chase returns or anything that would ultimately be detrimental to our clients. Thirdly we would invest client assets in the same securities and strategies that we invest our own money and our family’s money. This puts us on level playing field as we have the same interests.
You’d be shocked at how rare it is for investors and their advisors to be in the same positions. We have generated very strong long-term returns by staying true to these values and we believe that will stay the same in the future, but we can guarantee that there will be quarters or years where that will not happen. Anybody that tells you differently is simply a charlatan. If you look at the book value growth of our key investments, the trajectory has been tremendous. Just a few years ago, AGO’s operating book value was around $25 per share and now it is $42 per share. It’s adjusted book value has risen from around $40 to $60. After it reported earnings in November the stock was at its 52-week high. Nothing has changed in the business since then but stocks fluctuate. That is just what they do and it is why you never want to worry too much about short-term mark to market fluctuations. Should somebody sell a growing business just because of volatility when you know 100% that there will be volatility unrelated to the fundamentals of the business? Of course not, that is precisely how to invest unsuccessfully. Instead we buy more when prices are cheaper and we sell when stocks get expensive.
Below is a great little article that outlines the mistakes people make by chasing hot stocks, funds, or sectors. An investor should always be willing to take a 3-5 year view with things to let situations play out over the business cycle. Areas such as financials, healthcare and energy will look very different during that time frame, but if your focus is too short-term oriented you will miss the big moves. The article brings up Ken Heebner and the bifurcating performance between his fund and investors that simply chased performance, selling stocks when they were cheap and buying when they were expensive.
“Consider Ken Heebner, who ran the CGM Focus Fund, a diversified mutual fund that gained 18% annually, and was Morningstar Inc.’s highest performer of the decade ending in 2009. The CGM Focus fund, in many respects, resembled the theoretical opportunity outlined above. But the story didn’t end there: The average investor in the fund lost 11% annually over the period.”
Thank you very much and as always please let me know if you need anything at all!