What Do You Think About the Market?

Jim Spence

Ahhhh, we miss the good ol’ days of cocktail parties; the days when fellow guests swirled their cubes in expensive scotch and asked us: “What do you do for a living?” And when we said “We manage stock portfolios,” their expression revealed varying degrees of fascination and awe. These days, the gathering is a much more practical one such as a coupon exchange or a visit to the gym and when people ask us what we do and we give the same answer, they look surprised- surprised that those sorts of jobs still exist. Usually the next step is to change the subject and look around for a banker in the room who can find them a C.D. that pays 1.5%.

People who have known us for decades still often ask: “What do you think of the stock market?” Over the years we have come to realize this is a trick question. If we say, “We like it,” they want to know why. If we say, “We don’t like it,” they want to know why. And if we say, “We don’t really know for sure,” they wonder why they are asking us.

Here is the truth about what we think about the stock market: We are so obsessed with making sure we have learned everything we can about the durability of the competitive advantages we believe we have identified in the companies we own shares of, we have learned not to waste time and energy thinking about the stock market. We feel confident in this statement because there are a few things we have learned about the stock market in our combined sixty-nine years of investing experience:

•First, if you are right about what you think about the stock market for awhile, eventually you will be wrong about what you think about it for awhile.

•Second, if you are right about your thoughts on the stock market and sloppy or shallow in your analysis of the durability of the competitive advantages in the positions you own, you will be disappointed in your results. Good stock markets will not provide cover for bad businesses for very long. •Third, if you are right about the durability of the competitive advantages of the companies you decide to own shares of, TIME IS ON YOUR SIDE. •Finally, we don’t own the market; we own individual companies and not all companies are affected by all economic cycles.  Shares of some individual companies can perform well in a down market.

So, yes, it is true that sometimes we feel a little queasy about the markets. And when we say so people will ask us, “Why don’t you sell your shares and buy them back later when they are cheaper?” This proposition seems reasonable, reasonable that is until you compare successful and not-so successful investment strategies. Again, it is hard earned experience that has taught us that going through all of the tedious and painstaking efforts to put every company we are considering for ownership through rigorous and lengthy processes is worthwhile. And once we finally reach the conclusion that a certain company offers us all the favorable characteristics we are looking for, (i.e. we get the hard part right), if we were to sell based on what we think about the market, suddenly, once we have sold, TIME IS NO LONGER ON OUR SIDE. The greater risk becomes NOT owning a great business.

The point here is simple. We know that if we get the questions on financial characteristics right and the durability of competitive advantage questions right, and we monitor our assumptions daily, we do not have to give in to the temptation to sell and “hope” to buy back later, every time we get nervous about the market.  Thus, just as the object of investing has not changed in 2011, neither has what makes an investor successful.  So, as we celebrate the arrival of 2011 sipping scotch or clipping coupons, “Cheers” to the first year of the rest of our lives.