Well, the market is fluctuating, which isn't much of a surprise. Every day events cause the prices of thousands of securities to gyrate with dizzying velocity. Perhaps the 'fundamentals' are moving at the same breakneck speed, and the value of all future cash flows is being efficiently priced in from minute to minute, and day to day. Or perhaps not.
With so many people excessively concerned with the next quarter's numbers for the company they have their eyes on that day, it's no wonder that stocks move in such manic-depressive swings. Frankly, it's unlikely that a company such as Man Group was correctly priced at £3bn in March 2009, £6bn in November 2009 and now at £4bn again in January 2010. This is, of course, quite good news if you are able to stay focussed on the long-term in your outlook.
Taking the view that companies are very rarely correctly priced by the markets seems the only rational explanation to me of why share prices move so wildly over a one year period or so. The fact that they can fall 3-5% in a day if they narrowly miss forecasted quarterly numbers, seems rather short-term biased to me. And it creates a nice opportunity for people to effectively profit from the short-termism of the market and it's gyrating prices.
Man Group (EMG) is a good example. I first took a good look at the business in the summer of 2008. Back then the company was valued at £8-10bn by the market, and there were some serious problems brewing with respect to redemptions and the future for the hedge fund industry in general. My view was that if any hedge funds survive, Man should be one of them as it's very well run by nice and dull looking accountants and lawyers (this is meant as a compliment!).
That view hasn't changed, but redemptions appeared to stabilise with the markets in general during 2009. Next came some unfortunately poor performance over the year within their flagship AHL fund. But that's one bad year in a string of performance that is quite astonishing over a far longer period of 18 years or so.
So, now you're faced with some relatively bad results for the quarter, the year and maybe even a year or two in the future. But the business hasn't fundamentally altered in any way that I can see. They just had a bad year, and that happens to even the best fund managers who aren't composed of computer algorithms.
Anyway, I could of course be wrong in my assessment, but it does seem to me that a business worth between 3 and 10 billion pounds (as assessed by the market) is selling on the cheap side as it's had a bad year. Which is really quite nice for me, as I think it will do fine over the next decade or so, and currently looks cheap on that basis.
The point here, is that short-term myopia is the norm in investment circles and those chasing strong monthly performance for their funds. It just seems way easier to me to be picking up these things that are punished by the markets for having a bad quarter or year, but have not really changed their businesses recently and are still well managed, than to try and predict the unpredictable.
Focussing on what's important and knowable, rather than what is unimportant and unknowable is the way to make money, and yet so few people do it! Maybe it's a worthwhile process to try and predict the next gyration, but it seems better to me to try and think for oneself and remain rational. Better, but perhaps not particularly easy, and therefore quite a rare virtue to keep working towards.
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