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As Goes the Stock, So Goes the News

December 16, 2012 | About:
The Science of Hitting

The Science of Hitting

234 followers
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:

The Science of Hitting
I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves. As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.

I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.

Rating: 4.5/5 (17 votes)

Comments

kfh227
Kfh227 premium member - 1 year ago


Good article ;-)

I love herds. I love them even more as a value investor when it turns out that the herd is made up of Lemmings.

I am starting to realize that my use of Lemmings is often somethign people don't know about. It refers to a video game:

It refers to the popular 1991 video game Lemmings, in which the player must stop the Lemmings from mindlessly marching over cliffs or into traps.

I view most investors as nothing mroe than arm chair investors. That is the competitive advantage true value investors have that most others do not. Too many people are "arm chair" value investors.

Regarding RIMM, I might do another follow up that highlights alot of the known features coming to BB10. it will largely be comprised of YouTube videos.
The Science of Hitting
The Science of Hitting premium member - 1 year ago
kfh227,

I want to see that follow-up; I took a look at a YouTube video showing BB10 features after your article and I was quite impressed. Thanks for the comment!
kfh227
Kfh227 premium member - 1 year ago
Science,

Thanks. I'm very busy with things for the holidays. I have a feeling I'll have time come the 26th ;-)
The Science of Hitting
The Science of Hitting premium member - 1 year ago
Sounds perfect to me!

fkattan
Fkattan - 1 year ago
Great article. Thanks!

Nicolas73
Nicolas73 premium member - 1 year ago
Thank you Science,

I really appreciate this kind of articles (behavioural finance).

I think that by observing people (and our) overreaction helps to understand emotions,

and that is the first step to learn to control them!

Knowing yourself is the key!

Nicolas
The Science of Hitting
The Science of Hitting premium member - 1 year ago
Fkattan and Nicolas73,

Thanks for the kind words!

AlbertaSunwapta
AlbertaSunwapta - 1 year ago
You'll see the pattern for many fund mangers too. BRK the company under performs for some totally arbitrary period of time, usually a year or two, and Buffett the manager gets blamed and not the investors that are selling, and the other investors not buying the company. Same for many others in the past - Berkowitz, Watsa, Miller, et. al. People can't help but transcribe the behaviour and intelligence of many faceless investors as reflected in the share price onto the manager.

Buffett had good reason not to split the shares in order to attract, retain and educate a robust group of shareholders less subject to flawed market perceptions. Whereas Grantham, Rodriguez and others have had to suffer shareholder exodus despite being rational and right.

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