Focusing On The Calendar Year and Markets

January 7, 2008 by Joe Ponzio

Welcome to 2008 all. I am going to spend the next day responding to all of the comments from the past two weeks. Let’s get to the heart of the matter: What is going to happen in 2008? It is a question I have been hearing for the past three weeks, and is worth answering.

Here we go: Great businesses will grow; bad businesses will shrink; stock prices will follow in the long-term. Of course, when I say that, people respond with things like that’s no help or obviously or the likes. We all know that…so why can’t we believe it? And more importantly, why can’t we invest accordingly?

First things first, forget the calendar year. What will make 2008 different from 2007? Or 1997? Or 1967? When it comes to the stock market, the answer is a resounding nothing! The stock market will still be a place to buy and sell businesses – overpriced and underpriced companies, good and bad businesses, large and small operations.

Where is the economy going? The election?

Are we headed for a recession? Depression? What will the election mean to our portfolios? It doesn’t matter! If you are a short-term trader, these questions require a lot of thought and strategy. If you own businesses – businesses with moats that generate a ton of cash – you don’t have to worry. We’ve lived it (some of us, at least) and our businesses have thrived.

The Cold War. The Gulf War. 9/11. The Iraq War. Federal funds rates from 1.79% in 1955 to 16.39% in 1981, back to 4.79% in 2006. 6-month CD rates from 4% to 15% back to 5% over 40 years.

You ain’t seen nothing

In the last 40 years, over a period of six months we’ve seen the Dow drop as much as 32+% (1974) and run up as much as 48+% (1975). Great – but that was 30 years ago. Right – but it was also down 29+% (2002) and up 34+% (1999).

And yet, businesses continued to grow. As Buffett says:

You go to bed feeling very comfortable just thinking about two and a half billion males with hair growing while you sleep. No one at Gillette has trouble sleeping.

Do you own businesses run by management that can’t sleep when interest rates are on the rise? Are your companies largely successful because there is a Republican President? Will the next President’s party make or break their success?

What is 2008?

And that leads to the point of this discussion: Don’t focus on the calendar. Whether it is October of 2007 or January of 2008, the people at your company will be going to work every day to try and make you money. So long as they are banging away at their keyboards, ringing up sales, mixing chemicals, etc., they are working to make you more money. Your businesses aren’t likely to explode – for better or for worse – in just a few months or quarters. It will take years, and if you buy, hold, and sell on that premise, you’ll do very well.

Forget January. Forget 2008. Forget the stock market. Buy businesses and let time reward you for your good decisions.

My AEO stock is down and the markets are tanking!

But what about American Eagle Outfitters? The stock is at $18 and change! And it may go lower – a lot lower. Is it a good business? I think so. Are people still shopping at AEO’s stores? Yep. Is management still trying to reduce expenses, grow revenues, and generate more cash? You bet. Did you buy it hoping to make a quick profit? I didn’t.

When you buy an underpriced business, it may take years for the markets to correct their mistakes. Fortune smiled on us when JNJ and Wal-Mart ran up just weeks after I showcased them. The Tribune arbitrage play was meant to be a 3-week 10% profit. The fact that Amylin is down 23% since my July 26th cautionary post is a function of mere market fluctuations.

The stock market will do a lot of crazy things. It has always been that way; it will always be that way. Had you bought AEO in September of 1994, you would have seen your position slashed by some 80% over the course of the next year and a half. And had you held? A handsome, 13-year 22% average annual return at today’s price.

The market fluctuations are gut-wrenching. That’s why you have to ignore them. If not, you’ll drive yourself nuts and start making some really terrible moves.

If it works for Warren…

Buffett has been profiting from and holding stocks through the craziest, scariest, and wildest markets for more than 40 years. Think today’s markets are bad? You ain’t seen nothing compared to what he went through.

Price follows value. Maybe not today. Maybe not in 2008. But it does.

Now, let’s make some money the intelligent way and invest like real business owners/silent partners!

A Note From Joe Ponzio

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