I’ve just come back from the Latticework investment conference in New York.
Some of the world’s greatest living value investors were there – guys like Howard Marks of Oaktree Capital Management, Charles de Vaulx of International Value Advisers, and Mohnish Pabrai of Pabrai Investment Funds.
What struck me the most was that there was a lot of kvetching about being unable to find any bargains in the U.S. stock market right now.
This is a common complaint after the market has done well for a time. Many stocks have gone up… they seem a little pricey… so it becomes hard to find bargains.
But it’s also a common complaint when the stock market has gone through one of its fits… investors are down 20% or 30%… and stocks are falling out of the sky. Then people also complain that it’s hard to invest. Because fear is rampant and folks are worried in ways they weren’t before about all the different businesses that make up the stock market.
One of my favorite phrases about the stock market is that the hardest time to invest is now. It’s always hard to invest. If it weren’t, everybody would be making money.
That’s the No. 1 question I get from my Bonner Private Portfolio subscribers. At least once a month, somebody will write me to tell me they’re worried about the overall market.
Bill addressed this question really well in one of his letters recently. He basically said, “You make money by finding good businesses and sticking with them.” We’re 100% in agreement with that.
That doesn’t mean Bill is bullish on the U.S. stock market. But one of his guiding principles is doubt. Bill personally has big positions in gold and cash. But he also owns individual stocks. In fact, roughly one-third of his personal portfolio is invested in stocks.
Anyway, it’s not an either/or. You don’t have to say, “The market is going to hell. The world is going to hell. I’m just going to sell all my stocks, and I’m not going to own any at all.”
The market is like a wave. It goes up and down. You make a bunch of money in the bull market. Then you give some back in the bear market… and you make it back again in the next bull market. That’s just how markets work.
People spend a lot of time trying to avoid bear markets. But there’s no evidence anyone is able to see them coming ahead of time… at least not with any consistency.
And remember, you don’t have to own the stock market as a whole. You don’t have to own the S&P 500 or the Dow or whatever. Even in a market environment like the one we’re in today, there are always some interesting businesses to look at.
I always tell people, “There are thousands of stocks out there. If you don’t want to have a big stock portfolio, you only need to find a handful of good ones. Five to eight… a dozen, tops. Surely, out of the thousands of names that are out there, there’s got to be a dozen stocks worth owning.”
The idea of “stocks” is something that exists in our heads. Nobody owns stocks. What they own is ExxonMobil, or Apple, or Facebook. They own individual companies. And those individual companies are all different.
Just think about it. If you took a list of the top 10 best-performing S&P 500 stocks last year and compared it with a list of the 10 worst-performing stocks, you would get a huge disparity. It’s just empirically true that all stocks are not the same.
But I hear it a lot. People say, “Stocks are expensive,” or “Stocks are going to go up,” or “Stocks are going to go down.” But they’re talking about an abstraction – something that doesn’t exist in a practical sense.
I’m an individual. I invest in individual stocks.
So when people start talking about the overall market, it just doesn’t have much meaning to me. Unless, of course, you’re investing in broad market indexes.
By buying “the market,” you’re guaranteed an average return – no more, no less. But if you’re going to try to escape from the average, you can’t do what everyone else is doing.
If everyone else is saying, “There’s no point in looking at individual stocks,” or “You can’t predict ahead of time what stocks are going to do”… then maybe thinking in a contrarian way will pay off.
It makes sense to look at individual stocks precisely because everyone else is focused purely on the indexes.
There are lots of studies that support the Efficient Market Hypothesis. And there are lots of studies that show that there are consistent holes in that hypothesis.[The Efficient Market Hypothesis states that all known information about financial assets is quickly reflected in their prices and that, therefore, it’s impossible to “beat the market” without taking on extra risk.]
There are predictors. For example, companies run by owner-operators. There are lots of studies showing that if you invest in a company run by a CEO who owns, say, 10% of the company, shares in that company outperform peers where the CEO doesn’t own stock.
Or take family-owned businesses versus businesses that are not family-owned. The family-owned peers do better. There would seem to be certain predictive attributes that you can use to your advantage as an investor.
The efficient market crowd would say I’m one of the lucky “dart throwers.”[Editor’s Note: According to an independent audit, between August 2004 and October 2014, every $100,000 invested in Chris Mayer’s stock recommendations would have grown to more than $480,000. If you had put the same $100,000 in the S&P 500 over the same period, you’d have just over $209,000.]
They’d say that, given a large enough number of investors all trying to pick stocks that beat the market, there’s always going to be a certain subset that puts together a really good track record purely by chance. It’s like the coin flipper who gets heads 10 times in a row – it doesn’t necessarily indicate skill.
This is an argument that will never end. But starting with the assumption that the market is largely efficient – and therefore hard to beat – is not bad. Because it will make you careful as an investor. You can’t just look at a stock and say, “Oh! This stock looks cheap.” Maybe the market knows some things you don’t… and what you think is cheap is actually fairly priced.
Conversely, you might say a stock looks ridiculously expensive. But again, there may be something you don’t know or don’t understand. I try to approach every stock like that – very carefully. I’m always asking: What expectations are built into this stock price? Does it make sense? What’s the risk? What is the market seeing and what is it not seeing?
I’ve always been interested in smaller-cap companies – stocks I probably couldn’t recommend in Bonner Private Portfolio that have the potential to grow into something really big.
For my 100-Baggers book, I did this big study on stocks that went up 100-to-1 from 1962 to 2014. I tried to reverse engineer what made them so successful. You’d be surprised, but there are lots of really interesting small companies just getting started today that will make great investments in years to come.
Think about it like having a shot at buying McDonald’s when it had just 200 restaurants… or even 1,000 restaurants… or Home Depot when it was just a regional franchise… or Southwest Airlines when it was just coming out of Texas. These businesses have one outstanding ability – they can grow earnings. So, you can look down the road and see that they’re going to be selling at a higher multiple at some point in the future.
You often hear investors say, “Imagine if you could have found Starbucks when it had only 150 or 250 stores and it was just starting its expansion across the country.” Those are the kinds of businesses I would love, love, love to find.
The first way to do it is to stay small. If you’re looking for stocks with explosive growth potential, it’s a waste of time looking at Apple or any of the large-cap companies you hear so much about.
The other thing you have to do is learn when NOT to sell.
Just take any stock in your portfolio and look at its 52-week high and its 52-week low. There’s usually quite a disparity between the two. Why? Did the business change that much in a year?
No, it’s just the ebb and flow of the market. There doesn’t always have to be a rational reason to explain why one stock went down and another didn’t. A lot of 10%, 15%… even 20%… moves are pure “noise.” It’s just the flow of orders coming in.
Who knows why certain stocks move that much over a short time when the underlying fundamentals haven’t changed nearly as much.
As I said earlier, I try not to focus on market moves too much. I focus instead on the underlying businesses. That’s how I’ve made my living in the markets. I look at the individual trees when most people are looking at the forests.
Chief Investment Strategist, Bonner Private Portfolio
P.S. I just launched a brand-new investment service, and it’s totally different from my other advisory – the one Bill Bonner is following with $5 million from his family trust.
This new service is all about building a focused portfolio of smaller companies that – while more volatile – have the potential to become "the next Apple" and grow your money much bigger, much faster than the stocks I recommend in the service Bill follows. I’m talking about the kind of portfolio that can create a fortune for you with just one win.
You’ll find more details about the project here, but don’t wait too long to check it out. The presentation comes down at midnight tomorrow.