In times of market turbulence, I always think it is sensible to go back and take a look at letters and commentary from well-known investment funds and investors during past market corrections.
The wise words of investors such as Seth Klarman (Trades, Portfolio), Warren Buffett (Trades, Portfolio), Charlie Munger (Trades, Portfolio) and others, are, in my opinion, invaluable at these times of uncertainty and volatility.
Commentary from the Sequoia Fund is one source that I have found particularly valuable. One of the most successful investment funds of all time, Sequoia has been managing money for investors since the early 1970s. During the past five decades, the company has navigated a range of different market environments. It has always come out on top.
Sequoia's advice from 1999
The firm's value-focused investment style looked particularly out of place towards the end of the 1990s. At the time, tech stocks were all the rage, and any investment managers that did not have significant exposure to the tech sector were considered to be behind the times -- that included Sequoia.
Indeed, in the company's 1999 annual shareholder report, the firm's investment managers wrote:
"A number of our shareholders have written us in frustration with our lack of direct technology investments. We are all mind-numbingly aware that technology stocks comprise the current and virtually only -- area of market excitement today and have accounted for almost all the gains in the market indexes in 1999 and 2000 to date."
After expressing their frustration regarding the complexities of valuing high-growth tech stock, the managers went on to highlight the risks of abandoning rational valuation processes:
"Investors abandon valuation considerations in investing from time to time. You might be interested to read the following commentary by Benjamin Graham in reviewing stock market behavior leading up to 1929: "The notion that the desirability of a common stock was entirely independent of its price seems incredibly absurd. Yet the new-era theory led directly to this thesis..Instead of judging the market price by established standards of value, the new era based its standards of value upon the market price. Hence all upper limits disappeared, not only upon the price at which a stock could sell, but even upon the price at which it would deserve to sell.The results of such a doctrine could not fail to be tragic.""
After this investor report was published, the dot-com bubble burst. Sequoia's managers weighed in on the new market environment in their 2000 letter to shareholders:
"The year 2000 was characterized by extreme volatility created by thousands of hyperactive money managers and individual traders swarming from tech to the non-tech and from sector to sector looking for an escape from punishment, and hoping to get aboard the latest momentum favorite. This volatility created periodic opportunities for us to purchase stock in a number of fine companies at attractive prices, but the chance to buy significant amounts under our price discipline was often fleeting."
Sequoia returned 20% in 2000 compared to -9.1% for the S&P 500.
Insight into the investment strategy
These small snippets from the investment manager's letters at the turn of the millennium give us a great insight into the investment strategy it has followed for decades. They also provide a roadmap for investors in the current environment.
While it might be tempting to sell stocks and move into different positions as the market whipsaws between gains and losses, it is sensible to remember why you acquired your holdings in the first place and stick with companies you know and understand. Unless your underlying investment thesis has changed dramatically, there is no need to sell.
What's more, unless the evaluation of a stock has become exceptionally compelling, there is no need to buy any more. Just because the market has dropped 10% does not necessarily mean that all stocks are suddenly attractive.
Disclosure: The author owns no share mentioned.
Read more here:
- Charlie Munger: All Investing Is Value Investing
- A Look at Klarman's Smaller Stock Holdings
- Seth Klarman Increases His Favorite Holdings in the 4th Quarter
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