At BloombegSen we encourage our investors to do the following:
- Have a five-year time horizon (which is consistent with how we evaluate ourselves). It can and often does take time for the market to efficiently price a business. An example of short-term absurdity can be seen through the fluctuation of the share price of a very stable company we own. With no corresponding change in its earnings outlook, its share price declined 30 percent and then rose 100 percent, all within the last year.
- Focus on the underlying quality and valuation of the portfolio, not its daily, weekly or even annual price action. The quality of the research, the quality of the companies selected and what you pay for them versus what they are worth will ultimately determine long-term returns.
- Think about volatility as a positive, not a negative. Many investors believe that volatility implies risk. We view risk as the probability of permanent capital impairment over a long period of time. If a company we buy at $17, thinking it is worth $50, declines to $12.50, it has not become riskier; rather, it has become cheaper (assuming there has been no disproportionate change in fundamentals). Volatility creates an opportunity to buy more at a cheaper price.
- Maintain an absolute return long-term objective. We believe value investing through a concentrated portfolio is the best way to achieve good long-term returns.