Warren Buffett is probably the most quoted ‘market guru’, with pretty much everybody having at least one favourite Buffettism. One of mine is his comment that in a results statement there are only t wo things you can believe, the dividend amount and the page number. He undoubtedly said it tongue f irmly in cheek, but it does have a large element of truth to it. Results are totally subjective, even within the guidelines of the International Financial Reporting Standards (IFRS) locally and generally accepted accounting principles (GAAP) in the USA.
This also raises a bigger issue, that of the distinction between fact and opinion. I was having a debate last week after the US markets lost almost 2% on the last trading day of July. A comment was thrown out that “the Dow wiped all gains for the year last night because of Argentina”. I retorted that one half of that statement was fact and the other half was opinion. The fact is that the Dow Jones Index was now f lat for the year, but the reason for the sell-off (in this case the looming Argentinian default) was opinion.
This is a very important distinction. As humans we’re prone to find reasons for events, so a sell-off in an index, stock, currency or commodity needs to be explained, and we have 24-hour-aday TV channels and millions of blogs, Twitter accounts and more trying to do exactly that. But the reality is that while Argentina may have had something, or even a lot, to do with the sell-off, we don’t actually know what caused a majority of traders and investors to be sellers instead of buyers.
The point is that we inflate our ability to take literally billions of data points and come to a single coherent reason for any event. We really have zero ability to either gather or interpret those billions of data points. Every trade on every exchange across every asset class is a data point, and collectively they result in the moves that we’re trying to explain.
So, what do we do with this total inability to actually know the real reason behind any given move? Well, we accept this limitation and try to avoid making decisions based on opinion disguised as fact as far as possible.
One way we do this is to forget the short-term noise and rather focus on longer-term trends. We can convincingly say that the local market has been in a bull market for the last couple of years. We can convincingly state that retailers are no longer the f lavour of the month as they were back in 2010 to 2012. We can also look at results and not get overly excited by a single data point; we can accept that we’re making decision with far-from-perfect information.
This last point on imperfect information is important as it means that we won’t always be right. Being wrong is an important part of investing. Sure, we want to be wrong as seldom as possible, but in an imperfect world we will be wrong on occasion. It’s our job as investors to f irstly be able to identify when what we thought would happen is not playing out, and then we need to be bold enough to admit our error and take corrective action.
At an investor club presentation held at the JSE last weekend I commented that the best time to sell was never. But that was only possible if we or the company we’ve invested in never made a mistake. The truth is we all do, so while the best time to sell is never, when we have to sell we need to accept the limits of our knowledge. Sell, rather than taking it personally and holding on in the forlorn hope that eventually we’ll be right.