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Author: mungofitch Big gold star, 5000 posts Top Favorite Fools Top Recommended Fools Feste Award Winner! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 253178  
Subject: Re: Poll: I'm retired - my % in Equities is? Date: 7/9/2013 9:24 PM
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You may firmly believe that BRK's "correct" value is $185K, but Res tantum valet
quantum vendi potest (A thing is worth only what someone else will pay for it.)


It's in Latin, and I like Latin—I studied it for years—but it's still simply wrong.
The value of something is not the best offer available, but rather the present value
of what it will bring if sold the next time you get a fair offering price for it.
That's coincidentally about equal to the present value of all future possible cash distributions.
As you note, "stock prices are under no obligation to respond in kind
to improvements in fundamentals in any predictable time frame".
The simplest solution to that problem is not to ignore valuation, but simply to
exhibit the amount of patience that is required. Who needs predictability of time frame?
The last few millenia have demonstrated that it is safe to assume that
every business is fairly priced from time to time and the wait is
essentially never too long to make it worthwhile.
Indeed, if it's a decent growing business, the longer the better.

Provided you have a sufficient time horizon, the only risk (one, 1, singular) in owning
any non-overpriced stock is a deterioration in the prospects of the underlying business.
Everything else is transitory, so you just wait it out.
Pretty much every security's market price passes through fair value at least
once in a while. The wait is longer than 5-7 years so rarely that it can be ignored.
Anybody owning equities with money they might need in under 5 years is a fool, so this is no extra burden.

It's true I might be worse at valuing something than I should be, but
that's an entirely different risk. Hence my emphasis on sticking to the few
individual securities for which I think I have the valuation expertise,
or shotgun investing which includes all quant and MI approaches as well as indexing.

Sure, if you can pick things that will be fairly valued sooner rather
than later you'll do better, and picking things that pass through
fair value frequently is better than picking those that don't.
Attempting those things is certainly time well spent.
If you're good enough with predictions you can in theory even get away with
buying things that are not underpriced, but that's a skill that is very
unreliable—the process is unrepeatable to an unknown degree.
Like real estate investment, the most reliable approach requires only the
ability to do a "pretty good" valuation of some subset of securities and some patience.
It's easier in stocks than in real estate because a much smaller subset
of the market participants is even interested in valuation levels.
(your quote makes me suspect you are one such person not interested in value,
which means if I merely exhibit some patience you make the ideal counterparty).
If somebody offers me $1000 for my house tomorrow, that doesn't mean
it's worth $1000. I just say "no thanks". Same thing with the prices of my stocks.

Alas, not many of the stocks I own are breathtakingly undervalued.
At best I have stocks that are depressingly close to fair value but at least likely
to rise in observable value at a better-than-average pace in the next few years.

None of this suggests that quant investing or MI are a bad idea.
I think they are entirely sensible, since they rely on averages.
But I don't think anybody should select and purchase any individual
stock unless they know how to value that specific stock with passable
reliability and have the patience to wait for a fair offer for it.
This rule of thumb rules out all stocks representing businesses which
themselves are not reasonably predictable, and it rules out all individual
stock purchases as sensible choices for the vast majority of individual
investors since most investors have no idea how to value any stock.

Jim
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