Note: This article is reproduced from the March 29, 2016 edition of the Intrinsic Value Wealth Report.
A central theme of the Intrinsic Value Wealth Report is that investors should invest in good businesses that are growing – and not pay too much for those businesses. Warren Buffett summed it up as investing in “…the right businesses, with the right people, at the right price.” (Buffett, Warren., “Warren Buffett Talks Business.” The University of North Carolina.
Center for Public Television, 1995). At the Intrinsic Value Wealth Report, we publish the Cassandra Stock Selection Model to help you find these types of companies. The candidate list of stocks generated by the Cassandra Stock Selection Model is divided into five groupings that are segmented by market capitalization. We do this to give investors a choice of stocks in which to invest. The candidate list ranges from the more conservative stocks (larger capitalization stocks) to the more aggressive stocks (smaller capitalization stocks) – the assumption being made that risk increases the lower the market capitalization; a supposition that generally holds true.
Another central theme of the Intrinsic Value Wealth Report is that investors should hold these stocks for a long period of time – at least three to five years, if not longer. We are strong believers that once you make a stock investment, you should pretend that the market is closed and not look at the market again until you make your next stock purchase selection. That is not to say that you should neglect the stocks you hold in your portfolio. Quite to the contrary! You have invested in a business, and like any business, you should monitor how the business is doing – but you should forget about its stock price, at least in the short run.
One of the chief reasons for our philosophy of investing for the long term, and not watching the stock prices every day, is that as human beings we tend to be ruled by our emotions. The average investor goes through cycles of greed and fear – getting greedy when stock prices are going up; and becoming fearful when stock prices fall. And the reaction usually manifests itself in an overreaction on either side – that is to say that people are either very greedy or very fearful. Jason Zweig, a columnist with the Wall Street Journal, states the phenomenon this way: “…the more stocks go up and the faster they rise, the more likely you become to expect more of the same. And when they go down, your expectations fall with them. (Zweig, J., “The Worst Advice? ‘Just Trust Your Gut’.” The Wall Street Journal, March 19-20, 2016, P. B1). Zweig also references a study by Yale professors Robert Shiller and William Goetzmann, along with Case Western Reserve University professor Dasol Kim, where they show that “…investors’ forecasts regularly look more like aftercasts – simple projections of the recent past into the future.” While Zweig was commenting primarily on expectations for the stock market as a whole, this phenomenon applies to individual stocks as well. Zweig quotes the founding father of modern securities analysis, Benjamin Graham, as saying: “The investor’s chief problem – and even his worst enemy – is likely to be himself.”
So how do investors perform when they resist the temptation to trade in and out of their stock holdings, which is contrary to what many advisors, and their own gut instincts, would have them do? Many studies support the notion that less trading leads to overall better investment results. According to one source, “…Fidelity [Investments] had studied which customer investing accounts performed the best: They were the ones held by people who had forgotten they even had Fidelity accounts, and so did no buying or selling from them.” When this story was told on Bloomberg Radio, the Bloomberg commentator noted that he had noticed a similar phenomenon with families fighting over inherited assets: “Because of the extended court battles, in some cases, the accounts couldn’t be touched for 10 or 20 years: No buying new investments or selling old ones. Those families subsequently found that the period of inactivity was the time when their investments performed best.” (Kimelman, John, “The Virtues of Inactive Investing,” Barrons online, September 10, 2014). This anecdotal evidence suggests that the best investors are either forgetful or dead!
As a former trust investment officer for a large Midwest bank, and having managed over $200 million in trust account assets during that time, I also have witnessed this phenomenon of how well long-term accounts have performed. The investment policy at the trust company was to diversify the accounts and follow a strategy of long-term buy and hold investing. The accounts that pursued this strategy were most often the best performers.
The bottom line is this: Find the right businesses, with the right people managing them, that are selling at the right price; and as long as they remain good companies, hold onto them forever (or, at least as long as you can!). The Intrinsic Value Wealth Report provides the Cassandra Stock Selection Model, which generates and publishes an excellent candidate list of stocks in various market capitalization ranges, so that you can choose your desired level of risk. You should buy stocks from this list following the Step-By-Step Instructions for Using the Cassandra Stock Selection Model. The Cassandra Stock Selection Model is designed to find good businesses, with good growth prospects, that are selling at reasonable prices. The model has produced an excellent Track Record in doing so.
Once you have chosen your companies and put them into your portfolio, hold them for the long-term. If we at the Intrinsic Value Wealth Report have done our job, we have helped you get into the right businesses, with the right people, at the right price. Your job is to hold onto them and check them every once in a while to ensure that they are still good businesses. Checking up on your companies is not difficult – it is simply a matter of using some good common sense to see if these are still good businesses. If you use good common sense, you will know if they are! The various articles in the Intrinsic Value Wealth Report can enhance your good common investment sense to help you become a more knowledgeable investor and better able to assess the ongoing prospects of the companies in which you invest. When chosen right, most of your companies will be good for the long haul and will be companies you will want to hold for the long-term. You won’t be making a lot of changes in your portfolio using the system that we use and advocate at the Intrinsic Value Wealth Report. But, we believe you will get some very good long-term investment results!
