Opinion: Think long term for Buffet-like investment returns

For her, it is not easy to understand that her stocks represent businesses that are valued daily in the marketplace. When we last met, she was concerned that her investment had gone down in price for two straight months. That’s not an unusual reaction in up-and-down markets. For many investors who would like to have a Warren Buffet-type performance, there are a couple of key ingredients missing – a longer-term perspective and the ability to think of their stocks as an interest in a going business.

As Tammy talked about her business, we discussed many of the variables that determine her profitability, including receivables, payables, inventory control and fixed costs.

That led to my question of whether she would consider selling her business.

“Well, I wouldn’t want to sell it right now, because this has not been a good month, and the figures wouldn’t look good,” Tammy responded. “Maybe at a better time, like year end, which is always my best month and quarter.”

“Has the business grown each year in spite of the slow months?” I asked.

“Oh yes,” she said.

That was the point at which she gave me a look of recognition of where the conversation was going. She smiled and told me that she got the message that she should think of her investments in much the same way she thought about her business.

“So I need to be more patient?” she asked.

I nodded and suggested that there were two significant differences between her business and the businesses represented by the stocks she owned.

First, for her business, she had control as an active investor who knew every detail of what was going on, whereas the stocks represented her interest as a passive investor who had to gather information about the businesses from various sources. Second, unlike the stocks in her portfolio, her accessories business was not continuously priced and subject to the vagaries and emotions of the markets.

I encouraged her to not think about month-to-month portfolio valuations, but at a minimum, think in terms of year-over-year performance, and ideally to think in terms of five years. (It’s that patience thing again. If you want Buffet returns, you have to act like Buffet.)

There’s another lesson to be learned from this situation. Sometimes, in spite of spending considerable time with a client determining his or her risk tolerance, even the best money managers (ahem!) fail to fully understand the client’s true feelings and understanding about investing.

Tammy came away from the meeting better informed – and so did I.

Do earnings matter anymore?

Second-quarter earnings have been outstanding, with more than 65 percent of reporting companies showing numbers that beat the estimates.

So why is the market behaving erratically? The prevailing thought among the financial talking heads and print pundits is that the numbers represent where we have been, not where we are going. Those numbers, good as they are, cannot be extrapolated, they say, and until interest rate increases cease or Middle East tensions ease or oil prices come down or whatever, the markets will remain skittish.

OK, I’ll buy that, but let me throw in another, maybe minor, factor. Sarbanes-Oxley, the ill-conceived example of Congress swatting a fly with a sledgehammer, has jangled the financial nerves of a lot of chief financial officers and CEOs across America. (And resulted in billions of dollars of initial public offerings of stock being done outside the United States and beyond the reach of the Securities and Exchange Commission and Justice Department.)

Combine that with the class action litigation madness, and who can blame corporate executives if they fudge the numbers when they discuss future earnings? And this fudging is on the safe side, giving projections that are possibly deliberately low, knowing that there is little or no tolerance for negative surprises, and very little for simply hitting the number.

So why not under-project and over-deliver? Could it be that this is going on to the point that investors, and especially traders, are growing skeptical of the reliability of the numbers?

I don’t have the answer – just the question.

Note on oil pricing

Have you been getting phone calls from multiple promoters offering you the opportunity to buy into producing oil wells? I have, as have several of my clients and friends. Does it strike you as odd in that if the wells are such good investments, why are they selling them?

In the past, this kind of phone sales activity has indicated that the informed are selling to the uninformed and that the price of a particular commodity or industry is topping out.

Could it be signaling that oil is ending its upward move? Be cautious.

Clark Davis is a 37-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money-management company. He can be reached at cdavis@slia.com.[[In-content Ad]]