When Bad News is Good News

When Bad News is Good News

3 years ago
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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

IBB Price

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:

SPY Price 1

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.

SPY Price 2
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.