Chief Investment Officer, The Motley Fool
26 February, 2020
Well, I did it.
I wrote yesterday that I was planning to buy shares today.
And, while I gave myself the (legitimate) ‘out’ of not absolutely promising to do it, I went ahead.
Not because I knew this was the bottom for stocks.
For all I know they’ll fall again tomorrow, Friday and all next week.
Or, they’ll rise.
Not much of an ‘expert’ am I?
Depends how you define it.
See, the ‘experts’ said there’d be a double-dip recession in 2010.
The ‘experts’ at RBS said ‘Sell Everything’ in 2016.
The ‘experts’ at Goldman Sachs said the US market would rise 7% in 2019. They were only out by a factor of 4.
Pundits, as John Kenneth Galbraith noted, “forecast not because they know, but because they are asked.”
Which raises (or should raise) the question: If you don’t have a forecast, how can you know it’s worth buying shares?
A ‘forecast’ implies a target. Some expected, measurable event at some future point.
That’s how we get some people issuing ‘price targets’ for shares, and ‘year end targets’ for the ASX (among others).
I have no idea where shares will be by year end.
Because share prices, in the short term, are a measure not of value, but of popularity.
I’ve seen enough reality television (which, by definition, is any amount of time above zero) to know that predicting human behaviour is a thankless and all-but impossible task, at least in the short term.
But in the long term? Ah, that’s a different kettle of fish.
Want to know why I was buying today?
The simplest answer I can give you is “I think today’s share prices undervalue the long term earnings power of those businesses”.
Think Coronavirus is going to permanently damage a business? You’d better pay less for the shares.
Think Coronavirus is serious, and disruptive, but its effects will be transitory? Great; take advantage of others’ pessimism and buy!
That’s what I did today.
Not because I knew share prices would automatically and suddenly start rising tomorrow.
And not just because share prices were lower than at some point in the past. After all, plenty of companies’ shares fell… then fell… then fell, never to recover. Buying just because prices are down is silly.
But I bought because I expect the prices I paid, for quality businesses, will be attractive when viewed against the long term profit-generating potential of the companies whose shares I bought.
They might go down further in the near term.
I have no idea. Neither do you.
And it really doesn’t matter.
What matters is what the company is worth over the long term.
And it’s not just me saying that. I’ll leave you with a couple of quotes. The first is from wildly successful US fund manager and author, Peter Lynch:
“I don’t believe in predicting markets. I believe in buying great companies — especially companies that are undervalued, and/or under appreciated.”
And from Warren Buffett:
“I am not in the business of predicting general stock market or business fluctuations. If you think I can do this, or think it is essential to an investment program, you should not be in the partnership.”
He wrote that in 1966, by the way. Long before his phenomenal multi-decade investment performance made him the greatest investor to have lived.
Today, I narrowed my search down to a few companies that are attractively priced, compared to their long term future earning potential.
So I bought them.
Investing doesn’t need to be any harder than that.
Original article by Scott Phillip originally appears at Motley Fool Australia