If you view things strictly from your account balance, one can absolutely argue that all price declines are the same. That is the Financial Media Entertainment Complex (aka CNBC) approach to the market. They can tell you with great precision the point gain of this and the dollar loss of that. It is all BS and quite clown-like. No professional money manager worth their weight in salt looks at the capital markets this way. So if you are reading this and you get an alert that the Dow Jones is down 500 points and this causes you to look at your account or call your broker, you need to stop. You’ve got no process. While we are not going to re-invent an investment discipline in the next couple hundred words, I hope you will begin to view that markets in a little different way.
Above is a picture of a stock that has fallen about 50% from its high point. I wouldn’t touch this stock with a 10-foot pole. This is an exciting company. With the wild ramp higher in 2016 and 2017, you can bet this was darling on CNBC. Look at the points (that’s sarcasm)! Allow me let you in on a little secret. In the long-run, stocks pretty much are 100% correlated to their earnings or business value. Sure, from time to time the stock price (in black) will gyrate wildly from business value (in orange), but the two will ultimately converge at some point in the future. I’ll be the first to admit that it is people hitting the buy and sell button actually move price. However, the large, sustainable moves in price are driven by managers who can take sizable positions based on reasonable growth of the business for new buys and will subsequently scale out of those positions when the price moves too far too fast from the economics of the business.
Now let’s look at stock number two. For full disclosure, this is a stock that I own personally and so do my clients. The stock price has declined about 40% from the highs. Not quite as extreme as the first stock, but significant none-the-less. Here is the big difference - business value increased! It not only increased, it increased by a lot. Stock prices do not trade in relation to good or bad. “Is the business getting a little bit better or worse?” is the question to be asking. In this case, the business is getting a bit better.
These concepts are something CNBC would never discuss, because they have no clue. Prices, numbers, points are all meaningless unless that are relative to something else. Please remember that. Not all down moves are the same. Not all down moves should be acquired. In fact, many stocks that fall by 50% should be sold because they could be still significantly above business value and thus subject to further declines.
Sincerely,
P. Franklin Jr., CEO
All opinions and estimates included in this communication constitute the author’s judgment as of the date of this report and are subject to change without notice. This communication is for informational purposes only. It is not intended as an offer or solicitation with respect to the purchase or sale of any security. This information is subject to change at any time, based on market and other conditions. Any forward looking statements are just opinions – not a statement of fact.
Investing may involve risk including loss of principal. Investment returns, particularly over shorter time periods are highly dependent on trends in the various investment markets. Past performance does not guarantee future results.