In Warren Buffett’s 1987 shareholder letter, he wrote the following:
"Even though the business that the two of you own may have economic characteristics that are stable, Mr. Market's quotations will be anything but. For, sad to say, the poor fellow has incurable emotional problems. At times he feels euphoric and can see only the favorable factors affecting the business. When in that mood, he names a very high buy-sell price because he fears that you will snap up his interest and rob him of imminent gains. At other times he is depressed and can see nothing but trouble ahead for both the business and the world. On these occasions he will name a very low price, since he is terrified that you will unload your interest on him...
But, like Cinderella at the ball, you must heed one warning or everything will turn into pumpkins and mice: Mr. Market is there to serve you, not to guide you. It is his pocketbook, not his wisdom, that you will find useful."
One of the most popular companies in the investment community is J.C. Penney (NYSE:JCP); everybody seems to have an opinion on how this will eventually end (as usual, many of these opinions have been formed without reading SEC filings or even watching investor presentations). As an owner unconcerned with daily, weekly or monthly variations in the stock price, it’s been funny to watch how the perception has changed in correlation with the stock price: When traders were making money, Ron Johnson was a god unmatched in potential – and now that the stock has turned south, he’s little more than a nut without a clue about how to run a retailer (if you can’t complete a transformation in 90 days, you’ve failed by most market participants' standards).
I think this idea is best portrayed by the opinions of none other than Jim Cramer; here’s what he has said recently in the intro to an article he wrote May 17, 2012 (when the stock was at roughly $26 a share): “I'm still reeling from that hideous loss J.C. Penney (NYSE:JCP) announced last night. It was a total unmitigated disaster. As I predicted, CEO Ron Johnson over promised and under delivered — big-time.”
I found it interesting to see than Jim Cramer’s opinion had turned so quickly; here’s what he said in June 2011 (on the day Penney’s shares moved 20% higher to roughly $36) – “Johnson is amazing… he’s the greatest living merchant of our time.”
Just to reiterate — he’s the greatest living merchant of our time. I may be wrong (maybe he meant to say greatest living merchant of this quarter?), but that sounds like someone I would want on my team — particularly if I’m getting him at a price that offers significant upside with a strong real estate portfolio offering protection to the downside (and the backing of one of the greatest investors of the past decade, who has hinted at private equity interest in the company at a price in the mid-high $30s).
This brings up a quite obvious question — with the stock nearly 30% lower, shouldn’t Mr. Cramer be ecstatic about the opportunity to invest with this “amazing” CEO? I would, but I guess I wasn’t wise enough to see Mr. Johnson’s six-month transition from the greatest merchant of our time to a complete bum: “As I predicted, CEO Ron Johnson over promised and under delivered — big-time.”
Of course, the “investors” who follow Mr. Cramer lost a good portion of their investment by listening to him, even though he apparently thinks that he predicted the CEO’s impending disaster all along; maybe if JCP moves higher yet again (maybe when the announced strategy has been underway for more than a month?), we’ll hear Mr. Cramer recalling his original prediction about the success of the greatest merchant of our time.
For investors, this is all noise; while Mr. Cramer might not feel the ramifications of his advice, you will see the results in your brokerage account if you trade on little more than speculation. The intelligent investor must let Mr. Market serve them rather than guide them, and form his opinion about a business or CEO’s success or failure based on fundamentals, not the movement of the stock price.
About the author:
As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, "Patience followed by pretty aggressive conduct."
I run a concentrated portfolio, with a handful of positions accounting for the majority of my equity holdings (currently two). From the perspective of a businessman, I believe this is adequate diversification.