The Irony of The Market
TAP: I’m sure you’ve seen how, for example, Apple can have bad earnings, and Intel goes down, or Dell goes down. How do you get people to understand in the short term a stock can go down because of the sector and not because of anything wrong with the company?
That goes back to the notion that you are not buying stock as some lottery ticket. What you want to do is build a portfolio of stocks. When you find a stock has missed earnings or analysts thought they would get just a little bit more earnings per share, I find those to be temporary glitches. Personally, I wish corporations only reported their earnings twice a year. Quarterly reports with their expectations and whisper numbers have gotten too crazy. I think it hurts these companies. If you are heading a company that you have a five year vision for, but find you have to appease Wall Street every three months, it’s hard to enact a long-term business plan.
TAP: Now that we are in an economic downturn, is now a good time to buy for amateur investors to buy or should they wait until the economy recovers?
I don’t like when amateurs or pro’s, but especially amateurs, try to time the market. They never get it right. And sometimes the market zigs when you thought it was going to zag. This gets back to my premise; the stock market should be a life long endeavor. That does not mean you’re always totally invested. Times like this, in down markets, are some of the best times to invest. The oldest axiom on Wall Street is buying low and selling high. Unfortunately, the average person out there won’t do that. When we’re down [stock market], they are afraid. Last year the market was falling apart, what did investors do? They took 50 billion dollars out of US equity funds at the low of the market. If they had invested 50 billion, they would have made so much money.
TAP:Are there any sizes of companies you believe they should stay away from?
I roll the dice sometimes with smaller cap stocks. What worries me most is when people put all their money into an unproven company. That’s worrisome. Or they say, “it’s a 50 cent stock, it’s cheap.” The price of a stock does not determine whether it’s cheap or expensive. Most stocks under $10 dollars, in my opinion, are overvalued. Most stocks over a $100 dollars are undervalued. That’s been my experience. Too many people try to overload up on an unproven company because its stock is cheap. You have to have balance. You cannot be afraid to buy a $200 dollar Chinese Internet stock.
TAP: Do you believe that amateur investors should try to get into IPOs? Take the one company you mention Google. It was a hot IPO, but at the time its profit model had not been proven. It could have been another Yahoo or AOL.
Charles: Well, remember Yahoo did pretty well for a while there. Again, we are not marrying a stock. So I generally think that IPOs are good to buy. These are companies that are young and there is a demand for their product. The reason they are going public is because they need to raise money to buy a new factory, hire new workers – those are good things.
TAP: What are the signals for an investor to get rid of a stock?
When the business begins to stall. Look at some of the companies I’ve mentioned already. When Dell’s market share started to stall in the PC market, that was a red flag. When Starbuck’s same store sales began to lag, that was a red flag.
TAP: So people will have to begin paying attention to things they ordinarily would not have? The average person would not have known Dell’s sales started to decline.
No they would not have. Again, four times a year they put out their quarterly report. You pick it up and look at it. Then you go on the Internet and look at PC market share trends. It takes about three minutes to get that information. It will take some elbow grease. It’s not going to dominate your life—and it shouldn’t. But it will take some elbow grease. But it’s important, it’s critical.
TAP: There are a lot of things going on politically. To what degree should investors pay attention to what any President is doing?
Politics and the stock market are more intertwined than ever before. [The President] is starting a war with a lot of big businesses. What has happened over the last year with the banks? They have stopped lending money. They are also afraid of the new laws that are coming; new regulatory reforms. The ability for Main Street to get credit has gone down 14 of the last 15 months. That’s an all-time record going back to 1943. That’s problematic.
If you declare war on pharmaceutical companies, insurance companies and Wall Street, it could hurt our biggest companies and maybe make them weaker in the global economy. We have faltered in the past, but we were so far ahead of everyone else, it was not a big deal. But they are nipping at our heels right now, and if we stumble we may find ourselves in the back of the pack. The one key element missing in our economy right now is confidence. Corporations, banks and people are sitting on more money than ever before. That’s a sign of lack of confidence.
