For the regulars on my blog, you’ll probably know that I only purchase undervalued marketable equities, regardless of the view of the general market. Most of the time, I’m swimming upstream in most of my decisions in investments. Along the swim upwards, there’re many bystanders who keep yelling “hey dude, you’re in the wrong direction.”
As at that point, if the stock price is an accurate indicator of value, I admit I’m in the wrong direction. Having said that, I realized early in my proper investing road, I’m lucky to pick up the correct concepts through the best investing teacher in history, Benjamin Graham. He said, “In the short run, stock market is a voting machine. In the long run, stock market is a weighing machine.” What is important to me is the long run, therefore, as long as I invest at a fair price – it’d be much better if undervalued – I do not care if the price I invested at would go 10%, 20% or even 30% lower than at the price I got at. I realized the stock market is like a big gambling house – although it shouldn’t be treated as one in the first place. Maybe someone should put a bouncer at the front end to screen potential gamblers from entering. But then without these gamblers, the opportunity for prices to get out of whack (in both directions) from its intrinsic value will be seriously remote. With millions of market participants, it is impossible to know what the next fool or genius will buy or sell their stocks at. Not that I don’t feel pain when I see prices going even lower than the price I considered already undervalued. I too at times rant within that I could have gotten at a better price but ultimately what counts is not tomorrow, neither does it counts a year later unless you’re only keen to show results by making the numbers. What counts will be the progress of the business at the undervalued price an investor pays for in 10 years, 20 years or even for an investor’s lifetime.
But such long-term view will seriously reduce the number of potential businesses an investor can deploy their money in. When you can find one, you should pump as much resources in that business that meets the two criteria. Furthermore, if the stock price goes down yet further, ironically, in the measurement of risk by Wall Street, risk has increased. Hello, risk has increased because stock price plunged? Volatility as a measurement of risk is total nonsense. Risk should be measured by how much you understand the business long-term competitive advantage, the price you are paying at and ultimately the present value of all future cash flows the company will produce. For me as with all true-blue intelligent investors, a yet-further depressed price only serves as an opportunity to increase your stake in a fabulous business.
Thus far, for some of the purchases I made, I feel I’m actually profiting from the eventual class of entering shareholders who took my place. For example, Stamford Land, I bought the share at 29 cents in December 2005. At that time, the price was undervalued because investors did not care about the huge gain of property gain SL will record in the subsequent fiscal year. What happened, was profit then surged by 60% if I remember correctly. SL ended at a recent high of 65 cents. At that price, people were expecting a bumper dividend but they ignored a fundamental reality that any dividend is dependent on the business cash flow capability. I sold out at a much lower price because I do not expect to catch both the bottom or should I expect to catch the top. Then finally, SL issued their 06/07 report and 3 cents dividend was given. Coupled with the high price placed on its share, investors were naturally disappointed and it went to 55 cents (although still not a terrible plunge). The lesson here is an inferior class of investors ultimately entered the business compared to the superior class of investors who bought at an undervalued price. So what really happened was the superior class profited from an inferior class of investors. The higher the price you enter in, the higher your risk. So it totally debunks the concept of volatility as a risk.
I’ll end here for now. There’ll be a part two on some other investing thoughts on the difference between book value and intrinsic value.