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JRW Financial August 2015 Commentary – The Business Of Investing

JRW Financial investment commentary titled, "The business of Investing," for the month ended August 31, 2015.

JRW Financial - The Business of Investing

"Investing is most intelligent when it is most businesslike." – Benjamin Graham

Whew! Well, this has been interesting. The U.S. stock market has not seen volatility like the kind we have had recently since at least 2011, if not all the way back to the financial collapse in 2008. I advise continuously to avoid the day to day market noise, as it is just that: noise. However, declines to the extent we saw in the last weeks of trading, coupled with the sharp snapback of prices, cause even the most casual observer to stand up, take notice, and check their 401k balances.

I’ve written before about my fascination with the psychological aspects of investing known as behavioral finance. Humans are wired to act irrationally, particularly with respect to investing. We are paralyzed by the fear of loss when we see our holdings decline in price, and we seem to forget all about our fundamental investment theses or our process of being long-term investors. Irrational actions lead to underperformance.

I harken back to Warren Buffett's counsel: it’s much better from a long-term investment perspective to be fearful when others are greedy and greedy when others are fearful. In theory that makes perfect sense, but as with much of theory, putting it into practice proves very difficult. Still, with the amount of sudden fear in the market recently, and with little evidence to suggest a change in economic or financial conditions of a magnitude representative of a collapse in prices, it has been truly a time to show patience and discipline in the face of fear. As long-term investors, we have to understand that markets will go down, sometimes significantly, while we are invested. Rather than attempt to play an ill-fated game of market timing, however, we should look at declines as opportunities to buy increased stakes or new positions in best of breed businesses. At the very least, if you are not planning to sell stocks in up or flat market conditions, declines in price, though severe, should not cause you to change your outlook or process.

In reviewing the JRW Core Equity portfolio closely amidst the market turmoil, I found exactly zero positions I felt needed to be trimmed or sold on the basis of price declines. I believe in the businesses we own in the portfolio and I believe in their ability to compound future returns on invested capital. Further I believe our returns on investment will follow the trajectories of these businesses and that we are positioned well long-term. A down day, week, month, or even year does not an investment process make. We are sticking to our guns and maintaining our exposure in the portfolio. And as always, we are on the lookout for more best of breed businesses trading at reasonable discounts to our estimate of per share business value. I imagine that I will find a few interesting opportunities amidst the turmoil.

In last month’s commentary, I gave some information as to the benefits of having a long-term perspective on our investing operations. Part and parcel of this long-term approach is our insistence on viewing equity investments as ownership interests in the businesses behind the stock certificates.

If I...