“Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down” – Warren Buffett
The current market volatility brings up the age old question – buy, hold, or sell? Falling markets give investors a unique opportunity to buy high quality stocks at deep discounts. At the end of the day, stocks are not just flashing signals on our computer monitors. They are operating (and very often thriving) businesses, that one day “the market” thinks should be priced lower than what they might be worth, and that is what creates the conditions for buying at a discount. It is highly unlikely that on a down market day, all the businesses on the exchanges actually became worth less than what they were the day before. It simply means that they are trading at a discount because of market forces and “group think”, that is hard to fathom. However, as value investors, we favor high quality stocks that are priced at a discount to their intrinsic value, and that is where market corrections should present a welcome buying opportunity, rather than induce fear.
As the popular adage goes- If you love a stock at a particular price, you should love it even more at a lower price.
Market corrections of -5% or more have occurred about 3 times a year based upon previous history, -10% about once a year, and a bear market with -20% about every 4 years. So such drops are by no means unusual occurrences. We have no way to predict these, mostly news driven, episodes. And it does not make sense to abandon one’s investments based simply based upon the actions of what is essentially, a flock of investors all fleeing at the same time. That sort of behavior leads inevitably to “buy high and sell low”. It is smart to not buy a stock immediately when it has a huge rise, or sell on the day that it is falling.
As Ben Graham said, ‘In the short-run, the market is a voting machine -but in the long-run, the market is a weighing machine.”
The best defense to choppy markets is to have solid buy and sell rules written down ahead of time, and to follow them with a long term focus in mind.
– Toni DasGupta
Portfolio Manager, VVF