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Rupert Hargreaves
Rupert Hargreaves
Articles (1261)  | Author's Website |

Keeping Rational in a Rising Market: Thoughts From Seth Klarman

As markets become increasingly disconnected from real-life, investors need to stay rational

July 08, 2020

Recently, I've been thinking a lot about the current state of the stock market and value investing. Over the past few weeks, the trends present in the background over the past few years have become more visible.

The market is now prioritizing potential future growth over profits. In many cases, the market is also rewarding bankrupt equities and companies with no profits more so than established, highly profitable companies that have a track record of creating value for investors.

Trying to keep the faith in this market is quite tricky. For more than a decade, value stocks have underperformed. It does not look as if this is going to change any time soon.

As regular readers of my articles will know, I do not believe there is a clear distinction between value and growth. Instead, I support Warren Buffett (Trades, Portfolio)'s opinion that a value stock is a company that's trading for less than its intrinsic value. So, in some cases, analysts could argue that many of the stocks rising in the current market are doing so because their valuation is growing at the same time.

I don't doubt that this is the case, but this is not a uniform pattern. Tech stocks seem to be surging while many companies in other sectors which appear to offer value are languishing.

Comparing the performance of the S&P 500 year-to-date vs. the performance of the S&P 500 equal-weighted index offers a great view into the mind of the market right now. The former is roughly flat compared to a loss of 10% for the latter. Tech dominates.

In this market, it's crucial to maintain a long term focus and not get caught up in the euphoria. I'm not saying there will be a stock market crash, but I'm not saying there won't be one either. We need to prepare for all situations and focus on what we know, not what we think we know.

Klarman's advice

With that in mind, I've picked out some of Seth Klarman (Trades, Portfolio)'s best quotes on this subject to provide some reassurance in these troubling times:

"There is nothing esoteric about value investing. It is simply the process of determining the value underlying a security and then buying it at a considerable discount from that value. It is really that simple. The greatest challenge is maintaining the requisite patience and discipline to buy only when prices are attractive and to sell when they are not, avoiding the short-term performance that engulfs most market participants...

We are always long-term oriented. We never attempt to gauge near-term market movements; we have no edge there. We strive to make long-term investments that have truly compelling risk-reward characteristics. We are never afraid to stand apart from the crowd. We stick to our game plan, and focus on areas where we are skilled and experienced. We are resolute in resisting the short-term performance pressures and herd behaviors that plague the investment business."

These are only two nuggets of information from this highly successful investor, but building them into your investing process could help you avoid serious investment mistakes.

It's key to remember that even great companies have a price. Overpaying for a great business can lead to sub-par returns in the long term. What's more, just because the market is currently placing a high multiple on a stock does not mean that this will always be the case.

Long-term successful investing requires a long-term outlook. It is essential to look past the next few months into the next few years and establish how this forecast matches the company's current valuation and financial position. Using this method, it is not easy to justify the valuation of many tech stocks on the market today.

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About the author:

Rupert Hargreaves
Rupert is a committed value investor and regularly writes and invests following the principles set out by Benjamin Graham. He is the editor and co-owner of Hidden Value Stocks, a quarterly investment newsletter aimed at institutional investors.

Rupert holds qualifications from the Chartered Institute for Securities & Investment and the CFA Society of the UK. He covers everything value investing for ValueWalk and other sites on a freelance basis.

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