Time After Time

On Tuesday morning this week Under Armour Inc. (UA) dropped heavily to just over $30, a 52 week low and nearly 40% below its recent highs. The next day a slew of analysts downgraded the stock… after the fact. Atlantic Equities downgraded the stock to Neutral (whatever that means) from Overweight (I guess the athletic apparel company was taking its own advice by working out and being decidedly not Overweight…). Cowen downgraded UA to Market Perform from Outperform. Telsey Advisory Group joined the heard by downgrading the stock and lowering its target to $35 from $49. Again, all after the stock had already cratered.

You might think this is an unusual situation, the exception. I mean, these analysts follow these companies and make their recommendations for a living. But like clockwork, when a stock drops, analyst after analyst tells you what you already know – the stock is down – after having told you to buy when it was up. Then, after the stock rallies, the analysts get back on the bandwagon and upgrade the stock to Buy (or Outperform or Overweight or whatever their terminology calls for) once most of the easy gains have already been had.

So if professional Wall Street analysts get the timing of trading in and out of stocks wrong, how do those who don’t dedicate their time to stock picking and analysis fare? Similarly poorly. There is a reason why the average retail investor by way of mutual funds earns about 1/3rd the market return, and that is they tend to buy high and sell low. Such common money behaviors can have a devastating impact on your ability to achieve your long-term financial goals.

Look at a company like Qualcomm Inc. (QCOM). This is not some small startup, but a $100B multi-national that has been increasing its dividend at a double digit rate for years including during the financial crisis. Just 9 short months ago the stock was trading around $42 per share, the company left for dead. Investors were fleeing in droves, trading volume spiking to well above average levels. Yet nothing fundamental had changed at the company. It was still highly profitable. Its balance sheet – ability to pay and even increase its dividend – was as solid as ever. Its valuation on a relative and absolute basis was reasonable. It continued to have a dominant position within its industry. However, there it was, its stock price cut nearly in half in under a year, just as AAPL’s stock price had done a couple years earlier, with analysts quickly downgrading AAPL and dramatically lowering price targets – after the stock had already declined. Of course AAPL’s stock went on to nearly double within a short time thereafter and since its February low, Qualcomm's stock is up over 60%.

Warren Buffett is famously quoted as saying, “Rule #1. Don’t lose money. Rule #2, don’t forget rule #1.” He has also said, “...be prepared to lose 50% of your capital when you buy a stock.” How could these two statements co-exist? In the first quote he is saying don’t lose money permanently. As in don’t buy a bad company and see the stock get decimated with no ability to recover. But if you do your research and purchase a high quality company, then be prepared to have the stock price down in the near-term on the way to long-term gains. Indeed, shortly after he bought GE in 2008, the stock price declined from around $24 per share to just above $6! How did he fare in the short-term on his Goldman Sachs (GS) purchase? It went from around $150 per share to under $50 in under a year. Were those purchases mistakes? Did Buffett break his own rules #1 and #2? Far from it. He was not worried about the near term, he knew what he owned, and he was prepared emotionally (the most important part), financially, and from a time perspective to ride out any near-term dips on the way to long-term profits. In a few short years those seemingly losing trades quickly turned into highly profitable investments.

One of the greatest values an intelligent, disciplined, methodical professional Investment Advisor can bring to a relationship is this objective, non-emotions based approach to investing. While most investors are panicking – listening to the talking heads on TV or the so-called Wall Street analyst experts who are downgrading stocks at, yet again, the wrong time – the prudent Investment Advisor is calmly reassessing the fundamentals of the businesses he owns on behalf of clients. Everything still check out? Great, he has seen this all before – many, many times in fact. He knows that even very large blue chip stocks can and often do increase in price 50% or more in a short period of time. And all those who didn’t even understand what they owned to begin with – or more likely let their short-term emotions rather than long-term rational objectives drive their decision making – sold in a state of fear (making financial decisions in a highly charged emotional state has rarely served anyone well). At a minimum the prudent investor is sitting tight, collecting and reinvesting fat dividends at lower prices (QCOM increased its dividend over 10% and bolstered its stock buyback program earlier this year when the stock was down. These are very strong signals of management’s confidence in the future of the business). Better yet he is adding to positions at lower prices while others are bailing. Of course a couple years or sometimes only a few months later, those who bailed look back and wish they held – or bought more.

A stock you own – or the market at large – will experience a material decline at some point in the future. What will be your course of action? Do you really know what you own? Most investors define risk as short-term stock price volatility – the movement of stock prices up and down. But this is not a source of risk at all for those with a long-term time horizon; rather it is a source of opportunity. What is the real risk the typical investor is taking? The same risk with anything in life: not knowing what they are doing and making important decisions based solely on emotions, not on objective facts and a strategic perspective.

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