Memo to: Vailshire Clients
From: Jeffrey W. Ross, MD, RIA
Date: October 1, 2015
When Bad News is Good News
Warren Buffett, considered by many to be the greatest investor to have ever lived, has said, “Bad news is the friend of the long-‐term investor.”
This is because bad news—whether brought about by a company scandal, a defective product, or even a tweet by a presidential nominee—often lowers stock prices. And just like buying your dream house or favorite products at the store, paying a lower price is always the better option for the value-‐conscious shopper. The Rise and Fall of Biotech Stocks in 2015
From the above chart, you’ll notice something very obvious: the biotech sector (as denoted by the ETF ticker: IBB) was the place to be from January to mid-‐July. Since then, however, it has gotten clobbered. In fact, IBB started the year at $303 a share, reached a closing high of $398 on July 20th, then retreated back to $303 on September 30th… a rollercoaster ride for biotech investors!
Given the healthcare and biotech focus of our investments, Vailshire clients experienced a similar rise and fall.
In addition, new clients since the spring and summer months have generally seen the value of their holdings move in just one direction: down. While this feels bad in the short-‐term, it is actually good news for us as investors.
The Short-‐term Speculator versus the Long-‐haul Investor
Research has repeatedly shown that y our investing “world view” ultimately determines your investment success over the span of your lifetime. My job as your fund manager and/or investment adviser is to ensure that you think and—more importantly —act like a long-‐term investor.
Some examples:
- The short-‐term speculator (STS) panics when the market drops 10% and sells his holdings, taking a permanent loss. Meanwhile, the long-‐term investor (LTI) is relaxed and prepared, ready to put new cash to work by buying great companies selling at a discount.
- The STS sees a negative tweet from a presidential candidate (e.g., Hilary Clinton) about medicinal price gouging, assumes that healthcare equities are doomed, and immediately sells his biotech stocks for a loss. Meanwhile, the LTI knows that the sales and earnings growth of her large-‐cap biotechs will be untouched by such fleeting comments, and she scoops up even more shares trading at a discount—thereby increasing her passive ownership stake in great companies.
- Fearful of a “certain” collapse in the stock market that will happen “any day now,” the STS cautiously stays on the sidelines and keeps the majority of his money in cash and gold bullion within his house safe. Meanwhile, the “naïvely optimistic” LTI knows that the historical returns of the stock market are 9-‐10%. If she just stays invested in great companies, she is destined to achieve the same results… and grow quite wealthy.
Portfolio Panic?
Though you may be worried about the performance of your portfolio over the past few months, it is imperative that you do not panic. Rather, steel yourself to endure temporary losses, so that you will be positioned to benefit from the enormous gains that will inevitably follow.
Periods of intense volatility were also seen as recently as 2011, 2012 and 2014… and should be viewed as normal and healthy recalibrations in the ever-‐rising stock market. (You’ll notice that those corrections were merely “blips” in the relentless progress of the market on the final chart in this memo.) Given the long-‐term returns of the U.S. stock market, optimism in our investment future is actually just conforming to reality.
Back to Buffett
As the following chart shows us, the S&P 500 (ETF ticker: SPY) has also had a dismal performance thus far in 2015:
But patient, long-‐term investors understand that decreasing stock prices of great companies simply means better value for the price you pay. Short-‐term drops in the market are difficult to emotionally endure, but actually make for fantastic times to put extra cash to work for the years and decades to come.
Finally, this last chart of the S&P 500’s performance since 1993 adds true perspective.
While the short-‐term direction of the market is unknowable, we do know this:
When it comes to the share price of great companies—what comes down, must rise higher still.
Today, others are fearful. So—like Warren Buffett, the greatest of investors—we’re buying.
If you have cash on the sidelines, it’s time to participate in the enormous upside that awaits today’s brave investors. Please don’t wait until it’s too late. If you need assistance, give us a call or email today. We’ll put your money to work for you and your family immediately.
Thanks for investing with us.
Vailshire: Live well. Invest wisely.