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No. of Recommendations: 11
JoeSpecialOps,

Thanks for your post.

I'm not sure where the idea was communicated that stocks will not go down. To the contrary, they will. You can count on it. In fact, we like that. When our stocks drop, we can buy more at a better price. This is very different than growth investing. We care about valuation and relative attractiveness, not what market emotion is saying about price. This takes some adjustment for any investor, which is why it's not what everyone does.

We buy with a margin of safety, but margin of safety is not "safe." It is simply a calculation of what we think is a reasonable downside if things go wrong, as they often will. We estimate potential reward and if it's enough times the margin of safety, we think we could have a good risk-reward tradeoff.

Warren Buffett watched his Berkshire Hathaway shares drop 49% from the time he closed his hedge fund to the end of 1974. Berkshire was not worth 49% less. Thus his famous statement that "if you can't take a 50% drop in your stock, you shouldn't be investing," is based on experience. He could control his business and his investing, but not what market emotion does to stock prices in the short term.

If you had sold then, you could have missed a 31x gain in the next eight years. Which was still phenomenal from the pre-49% drop price.

Market emotion drives the short term. Stocks will drop. We like that.

We don't care about the stock price day to day. we care about whether business developments affect our initial estimate of reward for the risk, and whether we have better opportunities elsewhere (including cash). We are generally willing to wait as long as 2-3 years for the thesis to prove out or not. Sometimes this can be a very short time, or not. We identify catalysts, but the future is inherently uncertain.

Investors who expect all their buys to go up at purchase think they (or we) can time the market. No one can (or everyone would have sold in late 2007 and bought in March 2009). All one can do is control process, be rigorous, and make decisions based on consistent strategy. We know that in the end, this application produces superior results. What we don't know is when that will happen.

I hope this helps. Reading Joel Greenblatt's "You Can Be a Stock Market Genius," which describes pretty much what we do here, is incredibly reinforcing.

Today's stock market quote is one pico part of the beat of a butterfly wing. This month is a micro part. Four months is one beat. A year? Barely a few beats.

Thanks for posting. Glad you are here.

Best, Tom
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