Today was not a good day for the markets, to say the least. These daily market fluctuations don't faze value investors though, due to the conviction we have in our investments' true worth.
Recently I recommended an investment in Lockheed Martin Corporation (NYSE: LMT). Since it's a high conviction investment of mine I tend not to follow the daily ups and downs in the share price. Rather I keep an eye out for any new press releases or industry news that may cause a significant change in the model. Today, however, I couldn't help but notice that while the S&P was down by more than 2%, my investment in LMT was actually up 0.83%! Granted, this is a daily fluctuation that I already stated no interest in, but barring significant news one would expect a large-cap security like this to move along with the market.
I would like to believe that LMT didn't suffer along with the rest of the market because it is one of the truly undervalued stocks in today's speculative and possibly overvalued market. While we value investors don't give notice to daily fluctuations in share price, it comforts me to know that we probably do have the upper hand when the market decides to go south.
Daily price fluctuations are mostly noise and watching them too closely can be very dangerous psychologically (we tend to feel negative emotions more strongly than positive ones).
ReplyDeleteFooled by Randomness by Nassim Taleb has a great example of this (table 3.1 p65). If we assume a hypothetical stock w/ 15% gain and 10% volatility per year we would expect see a daily increase in the price 54% of the time. *inversely* the stock would be down 46% of the time.
Daily fluctuations have lots of noise but very little signal.
Also, it's good to keep in mind that buying below intrinsic value offers no guarantee that the price will not decline further...
Overall I agree with you, watch for press releases and especially new financial statements.
Well said, pritchie. What I meant about value investments is that perhaps they have less room to fall than growth as they are already well below true value.
ReplyDeleteThank you for the comment.
Best,
Jonathan
Although it is almost certainly true (don't have the data to back this up...) that a basket of stocks trading below intrinsic will dip less than the average in a downturn I don't think this is their greatest advantage.
ReplyDeleteThe margin of safety seeks to provide protection against *permanent loss*. Short term fluctuations can and will result in paper losses.
A stock purchased solely for the future growth potential of the stock itself seeks no such protection.
For me, this is the greatest advantage of value over growth.