A story worth telling
02 March, 2016
These days there are lots of investment conversations that I'm very happy to miss out on. I also find myself skimming over much of the business news preferring to search out the rare, interesting and value-adding commentaries that might help in my investment decision-making. It's not that I'm not interested – far from it – it's just that today's stories are not helpful. They are often simply noise, they are focused on the very short term and they often miss the wood for the trees.
My favourite part of investing has always been discovering the "story" behind a business, understanding what makes it better than its competitors and what might enable it to grow its earnings for many years into the future. If it can grow its earnings over time, its share price should ultimately follow. I've relied on a couple of guiding principles from Warren Buffett:
- buy on the basis that the stock exchange might close tomorrow and not reopen for five years (would you still want to own the stock?); and
- if you aren't prepared to own the whole business for ten years, don't buy a share in it for even ten minutes.
Good luck trying to find stories about businesses that you'd want to own for ten years and not be able to sell on the first whiff of bad news! Rather than being thought of as businesses, stocks are now typically seen as securities that wiggle up and down on a screen, with the wiggles usually explained by factors that have nothing to do with the underlying business.
Two recent market reports attempted to describe the volatility of global investment markets during January and February. In an effort to make their stories compelling they referred to the "six C's" in one case and the "three E's" in the other. The first explained how China, consumer demand, commodities, currencies, central banks and company earnings had "turned the market" and that investors should watch each factor carefully to determine their next moves. The second report suggested that elections (the US being the biggie), exits (especially the possibility of Britain leaving the EU) and energy (low oil prices) had created the "extreme volatility" of late and may be key determinants of investment returns in 2016.
The problem is that these commentaries – which are not unusual – are unhelpful because they focus on general macro themes rather than the specific micro factors that all investors must consider. For instance, when our portfolio managers recently took the opportunity of weak share prices to venture into stocks they had been watching, or bought more of existing holdings, they would have been unnecessarily hindered if they'd waited to first consider the implications of China's growth, currency moves and oil prices on the businesses they hope to own for years into the future.
Warren Buffett's latest shareholder letter referred to the irrelevant and often incorrect "noise" that can cloud our judgement. He noted that "It is election year, and candidates can't stop speaking about our country's problems (which of course only they can solve)". He said that this "negative drumbeat" is making many Americans feel worse about their future even though "America's economic magic remains alive and well". He went on to say that even though many commentators lament America's 2% GDP growth, "that rate will deliver astounding gains" and this tailwind will allow Berkshire Hathaway (Buffett's company) and "a great many other businesses" to almost certainly prosper.
Buffett's comments might sound like a different sort of story-telling – the overly optimistic kind – however he backed them up with a description of how each of the companies in his portfolio will prosper.
We can do the same when it comes to your investments – our stories are the sort worth listening to.