Stick to the fundamentals

Although I tend to write here about the economy and markets in general, I must admit such opinions affect my investment process very little.

I don’t buy and sell based on what the market is doing or might do. I don’t buy and sell based on my assessment of the overall economy.

I buy when I find businesses selling significantly below assessed value and sell when the businesses I’ve bought are selling significantly above assessed value.

I pay attention to secular trends, such as energy prices and the expansion of cable into phone and broadband Internet, but I don’t use such trends as a starting point in my investment process.

I spend my days researching individual companies. I look for businesses with good economics–with sustainable competitive advantages. I look for businesses with great management, who are competent and rational, act as trustees for shareholders, and hold a significant stake in their company. Then, and only then, do I assess business value.

When the market is tanking or roaring ahead, it’s important to keep this in mind.

The best way to succeed in investing is to buy good businesses below their assessed business value and sell only if price exceeds valuation. To do this, you must stick to the fundamentals–you must primarily focus on business economics, management and valuation.

When the market is diving, it may be an opportunity to buy, but only if prices go below assessed value. When the market is rising, it may be an opportunity to sell, but only if prices go above assessed value.

The focus is always on the business fundamentals primarily, and only secondarily on prices. What the market and economy are doing should take a distant, and almost completely unimportant, third.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

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Is the economy permanently less volatile?

I recently read a fascinating research paper by Lewis Sanders at Alliance Bernstein.

In it, he argues that the US and world economies are more stable than they were in the past, and that this may justify higher equity valuations going forward than we saw in the past.

The paper is well researched and raises some great points. GDP growth, inflation and corporate profit growth have been remarkably more stable over the last 11 years than over the previous 39.

This has been caused by a host of factors, including: less volatility in defense spending, less inventory volatility due to better inventory management, improved trade due to trade liberalization, more flexibility in the financial services industry due to deregulation, lower default rates due to better lending, and more efficient company financing due to private equity firms.

What could shatter this lower volatility and lead to falling financial asset prices? The usual: increased regulation, trade barriers, and geopolitical risks. These would all lead to higher inflation, lower efficiency, less flexibility and more volatile growth.

In other words, the risks are almost all political, and therefore very difficult to forecast. I think the political pendulum swings one direction and then the next, so I’m worried that all the good news over the last 11 years may not continue over the next 10.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.