Daniel Solin wrote an article in October that has gotten a lot of attention, and you can read it here: “Investors: Researching Stocks Is A Total Waste Of Your Time.” While each peg is probably deserving of its own response, there is one thing in particular I want to discuss—Solin’s argument that “everything is priced into the stock.”
Solin writes: It’s not difficult to understand the reason for this underperformance. We live in a world where information is disseminated almost instantaneously. All the news that could possibly affect the price of publicly traded securities is already known to the millions of traders engaged in buying and selling stocks. And it is immediately incorporated into the price of stocks. The possibility of an individual uncovering something these traders have missed is infinitesimally small.
Even if you concluded, based on your research, that a stock is underpriced, there must be someone on the other side of the trade willing to sell that stock to you. That person or institution has reached the opposite conclusion. Why would you assume you are right and they are wrong?
Let’s work those arguments in reverse order. First, let’s talk about the person that is selling you a particular stock when you place a buy order. There are many reasons why someone may sell a stock. Oftentimes, people invest with a particular goal in mind—a house, a charitable fund, university donation, retirement funds to live off, an education to fund, and so on. Someone’s decision to sell a stock could merely be the arrival of a certain goal, the time to turn a dream into reality. After all, the point of investing isn’t to amass money aimlessly (though I agree there are people out there who get misguided and do become this way), but to turn accumulated capital into a particular purpose. Also, sometimes you just need the money. You lose your job, have an unexpected expense, or whatever, and you withdraw from your stock holdings to pay the bill. There’s all sorts of reasons investments get sold that have nothing to do with commentary on the investment itself.
Also, if someone is selling a stock deliberately for company specific reasons, it doesn’t mean that the investment is bad. What if someone sells Procter & Gamble to buy Visa, believing Visa will compound at 14% while Procter & Gamble will compound at 8%? It’s not that they think P&G is crap; they’ve merely found a better opportunity. If Procter & Gamble is the kind of company that is within your wheelhouse of skills to evaluate, and you are satisfied with a safe 8% long-term return, why would you be upset that someone is getting richer faster as long as you are still marching towards your goals?
I remember a few years ago when I was buying Johnson & Johnson in the $60s. It was literally at the time Warren Buffett was selling. Talk about a heck of a situation—being on the exact opposite side of a trade from my childhood investing hero while I was in the process of making Johnson & Johnson my largest personal investment. Since then, J&J has gone from $60 to over $100, and played a growing dividend along the way. Maybe Buffett used those proceeds to fund the Heinz purchase, and he’ll compound the money at a higher rate. Also, companies that Buffett has discarded through the years have gone along to do quite well—McDonald’s and Disney come to mind—so the fact that Buffett is selling something isn’t proof the company is going to hell. And if Warren Buffett selling a stock isn’t proof that it is bad, why the heck should I worry about Joe Smith hawking shares of Chevron to me at $110?
To address the first part of Solin’s—that information technology has reached a point where all stocks are appropriately priced—ignores the fact that we are all operating on different time horizons. It has reached the point where operating on Wall Street or running a mutual fund has become a twelve to twenty-four month game. Very few people are interested in 5-10 year time horizons anymore, because people read investment news every day and can’t stand the thought of underperforming for a year or more. BP and IBM have underperformed for the entire history of me owning the companies, and I don’t care one iota, because I know BP will experience significant capital appreciation when the lawsuit clears way and I can see IBM’s earnings per share growth rate increase before my very eyes. I care about where those shares will be in the 2020s, and as far as I’m concerned, lower prices in 2014 and 2015 only provide reinvestment opportunity to enhance my compounding rate.
Almost every analyst I’ve ever talked to has agreed with me that BP is a great 5+ year investment. What they don’t know is how the stock will do in the next year or two, as low oil prices and adverse court rulings could make the stock a bad performer from a price perspective in the short-term (though, with the dividend this high, it provides the opportunity to “snack on the hors d’eouvres as John Neff would say, or add to my “bear protector” and “total return accelerator” as Professor Siegel would say). Being able to truly make decisions for the long term—not merely pay lip service to the term, but to actually make decisions with ten-year measuring periods in mind—is the individual investor’s greatest advantage which is rarely discussed. It flies in the face of everything being priced into the stock the heavy traders are usually reacting to short-term movements in the pursuit of making a buck. If you have confidence in your business judgment and the ability to make decisions in 2014 with 2024 in mind, you can move beyond all this pseudo-intellectual flummery and build a badass collection of ownership interests instead.