Gurufocus contributor kfh227 recently updated readers on his Research in Motion (RIMM) thesis (those who bought the company at the time of the first article have doubled their money); in that article, kfh227 said something that caught my attention:
“However, something strange is happening in the media. For the past year up to maybe a month ago, more than 90 percent of all articles were negative. But now people are changing and realizing that things are not that bad. Today, I'd say that over 50 percent of articles about RIMM are positive.”
Now, isn’t that ironic? As the stocks became cheaper and cheaper, people have had nothing but bad things to say (usually via blanket statements that rarely mention the valuation); yet, once the stock starts to turn in the other direction, this all seems to disappear (anybody who follows J.C. Penney’s (JCP) may have noticed a similar phenomenon in the past month, likely tied to the fact that the stock is up about 30% over that time).
In an article from a few weeks back, I said the following when I noticed something similar happening with Apple (AAPL); here’s what I said at that time:
“As I’ve noted in the past, analysts have a much different goal than long-term investors; as most research reports explicitly explain in the footnotes, analyst generally set price targets 12 months out. When looking over that short of a time period, beating or missing by a penny is life or death. When research outfits target such goals, they will attract clients who are equally short sighted; and when “I don’t know” becomes an unacceptable answer, you start getting explanations like the ones listed above. This is something you shouldn’t take lightly; it’s not a stretch to believe that reading analyst reports can negatively impact one’s ability to stay focused on what matters rather than short-term movements in the stock or in quarterly earnings.”
In Apple’s case, I can’t remember much of anything being said about competition, or the looming fiscal cliff, or the impact of sellers taking gains before year end in the articles I read up until October; that all changed as $700 became $510. Here’s a quote from a recent USA Today article that captured this:
“Apple Shares Still in Freefall, Head Towards $500”
“China is the second-largest market for Apple after the United States. Rather than long lines for Apple's latest smartphone, though, there was one person waiting at the Apple store in Shanghai's financial district when it opened, Reuters reported.
Lower-priced smartphones from Samsung and Nokia (NOK), some featuring more advanced features than Apple's offering, are taking market share away from the company in China, analysts say.”
I remember when Apple’s potential growth in China was all the rage; did investors analyzing the company’s future prospects expect that competitors would never show up in a market with 1.3 billion people and a rapidly developing middle class? In terms of competitors more advanced features, what would one expect in an industry where competitors are constantly jockeying for the lead position and products are dated in a matter of months?
The point I’m trying to make is an extension of what I’ve reiterated in previous articles many times before: one of the biggest advantages individual investors have over the crowd is maintaining a long term time horizon; doing so is only possible when you’ve adequately researched the company in question and will not be shaken by a combination of volatility and suddenly dower commentary from the financial media (with the opposite being true if the stock starts to shoot higher). Investing comes down to a critical measure – the difference between the price you pay and the value you get; if you’re buying something where that value can dry up in a matters of quarters, you better demand a huge discount in terms of the stock price (or avoid it all together).
If the company has a sustainable competitive advantage, the impact of a single quarter (or even a single year) is greatly diminished – the sustainable earnings power of the franchise will not be impaired by tax selling. Articles that fail to address price/value when suggesting a company is a buy or a sell aren’t worth the paper (computer screen?) that they’re written on; investors would be better off if they simply ignored this noise when contemplating future investment decisions.
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.