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Bill Freehling is a business writer for The Free Lance-Star and Fredericksburg.com. This blog is on Fredericksburg-area business. Send an e-mail to Bill Freehling.
For stock success, value trumps timing
"Is this a stock market bottom?"
During tough economic times such as these, you hear that question over and over on business news stations such as CNBC.
"Market mavens" will constantly be asked that, whether the topic being discussed is stocks, oil, housing or something else.
Every time this year’s brutal stock market tests new lows, the question is again dredged up. It’s an interesting discussion, but nobody knows when the bottom will be reached. It could have already occurred, or stocks might drop another 20 percent. We’ll know only in retrospect.
Trying to time the market is a waste of time. When considering an investment in a house, stock or something else, it’s best not to pay too much mind to whether prices could fall further. Rather, try to figure out the true value of the asset. If the value is significantly higher than the price, it’s probably a buy. Otherwise, it’s not.
Of course, that’s easier said than done. Nobody wants to buy a seemingly undervalued house or stock and then watch it decline further. But if you’re confident in your ability to assess value, these declines shouldn’t bother you too much. Keep the faith that, in the long run, value will win out, and see the short-term declines as possible opportunities to buy more.
I didn’t come up with these concepts. They’re pulled from the philosophy of Warren Buffett and other value-style investors.
One of Buffett’s more lucrative investments makes this point perfectly. It’s described in Roger Lowenstein’s excellent book, "Buffett: The Making of an American Capitalist".
Buffett’s company, Berkshire Hathaway, started buying large quantities of stock in The Washington Post Co. in February 1973. He determined that the company was worth $400 million, but the stock market was valuing it at just $80 million.
By September 1973, the stock had dropped 25 percent from where Berkshire purchased shares earlier that year. Buffett had failed to buy at the bottom.
His reaction was not to castigate himself and sell the shares for a tax loss. Rather, he greedily lapped up more shares at bargain prices, confident the stock was undervalued and unconcerned about the bottom.
At the end of the spree, Buffett had bought $11 million worth of Post stock for Berkshire. Although the newspaper’s stock has struggled of late, that $11 million is still worth more than $1 billion at recent prices.
If you’re like me, you don’t have the ability to see business value like Buffett does. But you can at least grasp the concept and try to find skilled investment managers with similar mind-sets. Or just put a little money into an index fund every month.
But don’t try to search for the elusive bottom. It’s a fruitless pursuit, despite what the "market mavens" will tell you.