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Shift Your Time Horizon For Maximal Profit And Minimal Risk

August 10, 2005
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By Dr. Sheldon Shi

Benjamin Graham and Warren Buffet taught us the secret of making money is to be out of step with Mr. Market. In retrospect it is so obvious it is plain truth. One way you can be out of step with Mr. Market is to shift your time horizon.

Mr. Market, a.k.a. the Wall Street, looks to the future. The conventional wisdom is that the current price of a security already factors in its outlook. It may be true. But how far does Mr. Market look out to? A quarter? Two quarters? A year? A decade? Unfortunately, the answer to this question depends on the mood of Mr. Market, who is not the most mentally stable person on this planet.

In fact, you may even say he suffers bipolar disorder. Because sometimes he doesn't care about anything other than the next quarter; but sometimes he is completely fixated on five years down the road. How many times do we see a company's stock dive after a temporary weakness for a quarter or two, yet shake our heads over an "irrational exuberance" that bids a company to stratosphere on some shaky promise?

Need I give examples? Just to beat a dead horse, let me throw in an example from my own experience. Later last year, Sanderson Farm's stock (SAFM) price went down from mid-50s to low-30s on forecast of weaker chicken prices. While SAFM's profit was going to suffer in the short term, one should always remember that chickens are commodities, whose prices go up and down cyclically. Regardless of the price fluctuations, people still eat chicken like they have always done. In fact, Americans eat more chickens nowadays because of the low-carb diet, mad-cow disease and other dietary trends. SAFM as a company had strong cash position and industry-leading operating margins. Based on this long-term view I recommended it in my Buffetteer.com star list. If an investor did the same with respect to his/her lookout horizon, he/she could easily pocket a 40%+ return in less than a year. (SAFM closed at $47.44 on July 14, 2005.)

When Mr. Market is obsessed with the next two quarters, look further - a year, two years, five years down the road. Is the company fundamentally sound? Is the weakness temporary or cyclical? If the answer is yes, take advantage of Mr. Market's short-sightedness. When Mr. Market is convinced of some projection of a company five years from now, it is time to focus on the near term. Is its valuation justifiable based on the current and near term financial forecast? If not, avoid it at all cost. By doing so you have cut down your risk tremendously, because Mr. Market has as much chance being right on the money five years from now as a meteorologist being right on his five-year forecast.

Being out of step with Mr. Market is not equivalent to doing exactly the opposite of Mr. Market: buy when he sells and sell when he buys. Rather, as a value investor, one should always be ready to focus on something that is overlooked by Mr. Market. If you pay attention to a different time horizon from that of Mr. Market, and don't let the current weakness or strength influence your decision, you will have a better chance to maximize your profit and minimize your risk.

Sheldon Shi, Ph.D., editor of Buffetteer.com, a site for intelligent investors.

 


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