Hello Everybody,
The last few weeks have seen a torrential downpour of bad news. To briefly recap: Greece is very likely headed out of the Eurozone, barring a massive last minute effort on both sides to come together to preserve the Union. The Chinese stock market after being up 135% over the last year, has now entered into a major and accelerated bear market. Just today, “technology glitches” shut down the NYSE, United Airlines and the Wall Street Journal.
While these are certainly compelling headlines that make for sensational business TV coverage, the actual impact on the underlying businesses is extremely small. If Greece and its less than 2% of Eurozone GDP leave the Euro, you aren’t going to sell your farm, your restaurant, or your insurance company. We didn’t benefit from the bubble in Chinese technology firms with highly questionable accounting and stratospheric valuations, and we aren’t going to be impacted by them crashing back down to earth. Hacking and “technology glitches” are an unfortunate reality that we will have to deal with more and more, but they will also create opportunities for certain businesses. I can assure you, that Warren Buffett didn’t sell any stock based on these short-term headlines, which are emphasized to such extreme levels to boost ratings and sell advertising.
When news is bad and markets are crashing it is so easy to get down and think the worst thoughts. This is where Benjamin Graham’s concept of “Mr. Market” is so important. Everyday Mr. Market gives us a price to buy and sell our investments that we can take or leave. Mr. Market is an extremely finicky fellow and his moods vary from extreme euphoria, to deep pessimism and his prices reflect that. The businesses that we have invested heavily in are growing in value in most cases, and are trading at deep discounts to intrinsic value. Short-term changes in stock prices don’t reflect declining business conditions. The biggest key to investing successfully is controlling your emotions and always maintaining a business approach to investing. There are incredible buys right now, not unlike there were in late January after a similar decline in prices. During that time I wrote this article: Dealing with Extreme Volatility, where I specifically mentioned AIG, which had sold off to $49 per share. We bought aggressively and the stock rallied well above $60 just a few months later. There are similar opportunities right now.
Volatility jacks up all options prices. This means that options that we’ve sold become more expensive causing short-term, mark to market losses. It also means that options we sell now, will benefit when volatility declines. We sell options with the intention of holding them until expiration. At that point in time, volatility and time value go to zero, and the only thing that matters is where the stock is. The worst case scenario is that we will end up owning the stocks that we want to own, at even cheaper prices, and then we get the most upside possible as the businesses continue to grow in rally. Don’t worry about short-term swings that mean nothing, but instead look for opportunities. Earnings season is kicking off today and we will now begin seeing how our businesses are doing. I believe that our financials had fabulous quarters and other companies in our portfolio are steadily creating value as well. I’ll be sure to write lots of research reports to keep you informed on important aspects of our investments. Keep in mind that housing is doing extremely well, which is a major contributor to GDP. Mergers and acquisitions activity has been extremely robust, providing a great deal of advisory revenue to the big banks’.
Assured Guaranty (AGO) has had quite a bit of good news since its stock took a hit after the Puerto Rican Governor’s misguided statements. S&P affirmed their AA rating, Puerto Rico made payments on all of its various debt obligations and Puerto Rican officials have acknowledged that they are not looking for principal reductions, but instead are looking for extended maturities or reduced rates. This situation will get worked out and is already being reserved for by the company. Stocks go up and down all of the time, but by focusing on the value of the underlying businesses we are able to buy and sell accordingly based on our knowledge of the value versus the price offered, as opposed to being consumed by emotional decision making. As always if you have any questions feel free to contact me, but the best advice I can give is to not get too enthralled on headlines, and instead focus on achieving your long-term investment goals. We have been through this type of uncertainty many times before and there is always uncertainty. Those that panic almost always end up being the financial losers, while those that keep their cool end up with accounts that are considerably higher over the course of time. I’m confident that our clients will be the latter!