Investing is a real long-term endeavor. You would have to suffer periods of frustration at times in order to enjoy eventual gains. Even one of Warren Buffet’s greatest ever long term investments (Washington Post) looked like a complete loser for the first few years.
However, we would like to highlight that there are many stocks that also fall and do not rebound. Thus, we would like to point out and emphasize on the importance of stock selection: picking out a counter with solid year-on-year fundamentals, a healthy underlying business and a rock solid balance sheet as that is what’s important in the long term.
Let us discuss and build upon the case:
Buffett appraised assets based on information that was readily available to the anyone. He believed he was buying the Washington Post at 1/4 of its fair value.
Through 1973 and 1974, it continued to do fine as a business, and intrinsic value grew. Conversely, by year end 1973, Washington Post showed a loss of about 56% from $37 to $16 as the Nixon Administration challenged several licenses of the business. The company, which was intrinsically worth $400-$500 million dollars, was selling at $80 million dollars which included newspaper, four big television stations and close to no debt. He termed the market’s valuation as “ridiculous” in his Bloomberg interview and ended up spending around $11 Million in total to purchase shares of the Washington Post.
But here’s the catch: The Washington Post’s stock tanked by around 20% after Buffett’s purchase and had remained there for three years! That was a paper-loss of around $2.2 Million dollars. However, Warren revisited the financial statements and found out that there was no significant change in business fundamentals. He thus decided to hold and wait for the market to realize the Post’s true value. By the end of 2007, his stake in the Post had grown to US$1.4 Billion which is a gain of more than 10,000%.
Most retail investors, like ourselves, would have our stomachs churning at the sight of our stocks falling 5-10%. Some even begin to slowly cut their losses, doubting their prior investment decisions and terming it as a moment of folly.
Thus, one should acknowledge that stocks can rise and fall like a roller-coaster despite there being hardly any changes to their business fundamentals. This could be caused by market corrections and the release of unfavorable news. The next time you see stock prices tank, don’t panic, dig deeper beyond the surface and revisit the company’s fundamentals. The underlying business may still be healthy and relevant – and that’s what is most important over the long term. Investors might just have been overly pessimistic about the stock, which created a wonderful opportunity for one to capitalize on. One might even consider averaging-down and adding to their positions depending on their risk appetite.
We took this opportune timing to highlight the aforementioned case due to the recent volatility caused by our ‘dear’ American President’s series of tweets which heightened and exacerbated US-Sino Trade war tensions, causing markets to tank. However, we would like to mention that market corrections are rooted in psychological factors or fear – they are not based on fundamentals and are usually fleeting. It is an inevitable part of owning stocks. From 2010 to 2019, there has been 8 corrections thus far, all of which reverted back to a bull market. If one decides to sell their positions and stay out of the market in those aforementioned periods, they would have greatly regretted on hindsight.
We do not know whether the current downturn would be a correction or crash, but history has proven that the past 8 corrections have caused “crash doom-sayers” to miss the boat. Resulting in them selling at lower prices and buying/entering back at higher prices.
We hope that the article has been helpful in making more well-informed investment decisions. Till next time !
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