WARREN BUFFETT SAYS, “In the short-term, the market is a popularity contest; in the long-term, it is a weighing machine.” A possible way to interpret this is that no one can predict with meaningful accuracy what any publicly traded company’s stock price will be tomorrow but almost anyone can learn to correctly anticipate, most of the time, what the likelihood of success for an established business that they understand will be over time.
Short-term vs Long-term
Predictions that are accurate most of the time, done often enough, provide an opportunity to create wealth. This intentionally simplistic distinction between the unknowability of the future price of a stock and the near certainty of understanding the intrinsic worth of a business underlies the difference between trading and investing. To paraphrase Oscar Wilde — a trader knows the price of everything and the value of nothing.
Don’t get me wrong. I know successful traders; I respect them. I’ve worked with them and I’ve helped to create some of the portfolio modeling tools and transactional platforms that they use to manage the holdings of some of the wealthiest individuals and organizations in the world. So, I don’t compete with them.
You only have to do a very few things right in your life so long as you don't do too many things wrong.
Technical vs Fundamental Analysis
Sometimes the prices of publicly traded businesses seem to follow rhythms that can be charted into pretty patterns, waves and cycles that appear ordered and mysteriously prescient. Adherents of this type of technical analysis will explain that human psychology and thus human behavior follow predictable rhythms and that the charts thus reflect and predict this aggregate market behavior.
Then suddenly the patterns just don’t work anymore. News of economic or political upheavals halfway around the world seem to drive the prices of seemingly unrelated businesses to unprecedented highs or lows.
Mr. Market is famously irrational, emotional, and some would say bipolar — at least on a day to day basis. Yet, it seems relatively easy to forecast, in broad terms, the performance of certain businesses over the course of years. These predictably reliable businesses are typically well known, well established, well run, and generally considered boring.
They don’t have to be boring, though, just reliable. Some bellwethers of the technology sector are among the world’s most valuable companies. They evoke both passionate devotion from their fans and equally passionate disparagement from their detractors. Both sides engage in endless online and on-air debates over the impact, import, and merits of the latest rumored products and services.
Traders trying to time their entries and exits into and out of dynamic positions in these companies consistently get burned. Yet, their long-term owners are reliably rewarded.
Wealth Building Strategies
The things that big traders can do with after-hours trading, offshore accounts, automated execution systems, and dark pools don’t really scale down to the level of individual retail investing.
Yet, tax protected IRA and Roth IRA accounts in the United States provide completely legitimate and legal tax advantages comparable with those exploited by the ultra high net worth clients of offshore private banks. And, given enough time, long term owners of some companies find that their dividend income and premiums from covered options sales can lower their cost basis (the money paid out of pocket to buy the stock) to the point where they, in practical terms, no longer have any of their original money at risk!
Someone's sitting in the shade today because someone planted a tree a long time ago.
Focused and disciplined value-based investing is not nearly as exciting as high frequency automated trading but it works. The zen of it can be explained plainly. Warren Buffett says, “find a wonderful business and buy it an attractive price.”
published by James Boyer