Investing: Ignoring the Short-Term

In investing, you’re not right or wrong because the price in the short term is moving up or down. You’re right or wrong because the business does, or doesn’t provide acceptable returns over time. I know you’re not foreign to the idea though, it is like your own investments that you’ve made in the past

In 1999 a number of investors held their shares in good businesses which were going to make money for ever and ever and lost 90 percent of their money, and a lot of those shares never recovered…..and no I’m not talking internet rubbish, I’m talking the type share that the buy for life brigade buy..same in 2008.. good businesses which were going to make money for ever and ever lost 90 percent and still maybe good businesses but the shares never recovered…again I not talking flaky mining companies but the buy for life brigade…

People in 1999 paid too much money to own those businesses.

They were given an “absurd offer” like I say 🙂

If they chose not to accept that offer, they did so knowing the offer was something like 40x earnings, in say Unilever.

If you’re holding something you know isn’t horribly overpriced, it would make no sense to blindly sell because of worries the price will fall.

But if you bought your stake in those companies in say 1996, and you’re suddenly being offered a ridiculous amount for them (like 40+ times earnings), then it’s just like if someone wants to buy your house.

If they knock on the door and offer £1m, and you know it isn’t worth £500k, then it’s purely a sentimental decision whether you want to sell up. That’s a valuation problem rather than a bear market one.

You could still be perfectly happy 20 years later with that business, still producing excellent business results. In ULVR’s case, the 1999 peak of £15 was an absurd price, but the shares have eclipsed that now.

If I were holding stuff where there was a huge growth premium attached then I might be more worried. But nothing I own is priced above fair value, the companies are generally modestly undervalued. Likewise 10% growth multiple would be difficult to justify from an investment standpoint without entering into some serious speculation on the future. Nothing wrong with a speculative valuation – this is often how smaller companies are valued.

The trick is knowing better than the market roughly the intrinsic value of your business. You can’t be 100% accurate, but you can’t let the market tell you what everything is worth – at least not when investing 🙂

If I pay $100 for something earning $10 today, it doesn’t matter to me if the market only offers to pay me $70 next month, if I’m confident that the company will be earning roughly $20 in a few years’ time. What will the market price be then? No idea, but good things happen if you focus on the business. A good bet might be $160-300, but you never really have to sell.

We’d never sell a £200k investment property we’d bought after 1 month if someone knocked on the door and said “I’ll give you £150k for it now”, we’d slam the door shut. It would be madness to panic and accept the random offer – the same applies to if you owned a corner shop, a restaurant, a farm or a multinational enterprise.

Of course, this is entirely separate to trading matters, there are no right or wrong ways to approach the market. But where my long term account is concerned, I really have no interest to sell, bear market or bull market, so long as the business is fine and the price is fair 🙂