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JRW Commentary July 2015 – Investing For The Long Haul

JRW Commentary July 2015 - Investing For The Long Haul by Joe Weidenburner, Aeternitas Investing

JRW Commentary – July 2015

“Investing for the Long Haul”

Earnings season has been in full swing over the last few weeks as corporate officers kneel before the analyst community and lay bare the fortune or misfortune that has befallen their firms over the previous 3 months. Company reports usher in a period of volatility in the stock market as market participants make their feelings known through aggressive buying or selling shares in response to what the company has to say. This volatility in response to incredibly short periods of performance has caused me to reflect on the long-term nature of our investing philosophy.

I find it remarkable how short-term oriented many market participants are in practice. This goes for investment professionals as well as clients and other individuals who have money invested in financial securities. There seems to be an overwhelming desire to do something at all times. I believe this mindset has deleterious effects on long-term portfolio returns.

Below I will try to highlight some of the areas where I believe our clients are well-served by the long-term nature of our investment operations.

  • A long-term approach breeds patience.

Patience is highly underrated in terms of the character traits most important for successful investing. We try to incorporate as much patience as possible into every investment action we take. The stock market is a gold mine for the impatient. There is always opportunity to do something. However, studies have shown that constant activity in the stock market leads to underperformance[1]. To characterize how investors should act in relation to daily stock market fluctuations, Warren Buffett inverted a famous saying: “Don’t just do something, sit there!”

The beauty of the stock market is that you do not have to be doing something at all times to be successful. Patience allows us to wait for the high-probability, low risk of permanent capital loss opportunities. There is no rule that requires us to invest in mediocre businesses trading at inflated valuations when we cannot find wonderful businesses trading at fair and reasonable prices. In those situations, we are best served by sitting on the sidelines with dry powder waiting for the best time to invest. Our discipline is to invest in competitively advantaged businesses when the market fails to fully price in the extent to which the business will compound per share business value over the long-term. Those opportunities provide the highest asymmetric return potential. They are rare. Most wonderful businesses trade at market prices that reflect fully the potential for compounding. Some even trade at valuations that far exceed rational expectations. We are perfectly comfortable sitting when there is nothing to do, because we know the market will eventually provide us the opportunities we seek.

Patience allows also for clarity and depth of thought within the research process. Buffett argues that investors should act as if they have a punch-card with 20 spots available in their lifetime. When you buy a stock, you punch out a hole on the card, and once all 20 holes are punched, you cannot make any future investments – ever. If we only had 20 investments to make over our lifetime, we would put a substantial emphasis on researching as much about a potential investment as we could, and we would require a significant margin of safety before making a purchase.

We do not chase hot stocks in the hopes of short-term gain. We focus on getting to know the businesses we follow as if we were the sole owner or looking to purchase the entire business outright. When we make an investment on clients’ and our behalf, we do so with great reverence for the fact that hard-earned money is on the line. Putting this money to work with incomplete information or because “everyone else is buying” is not part of our investment calculus. If we did not take a patient, long-term approach to investment research, we believe we would be doing a great disservice to our clients and ourselves.

This is the patient, disciplined approach we offer through our investment operations. Because we are long-term oriented in our focus, we believe that market opportunities will be plentiful over time, and we do not feel the need to “do something” constantly. We are able to focus on...