Value investing refers to investing based on fundamentals and understanding that short term fluctuations in the market may not reflect that.
I wanted to quote this because in essence, this is what has guided most successful investors. There are many other success stories like Ed Thorp who used options, or macro guys like Ray Dalio who trade in hundreds of markets. But the commonality between all of them is that their models are based on some fundamentals at some level. Is the per capita GDP growing or contracting? Is the environment inflationary/deflationary? I think that short term fluctuations are like what I described above - simply sentiment based on mostly on fear. I ignore them if they have no basis of reality. For example, brexit caused a nice little dip in the markets - brexit on the short term wouldn't effect my company's long term earnings in any significant way.
As an example of of short term fluctuations in my holdings ( an airport based in Mexico that went down 30% due to trump's election) - how on earth would trump effect an airports earnings? Would fewer people travel to mexico? Unlikely. Would trumps wall effect the airport's barrier to entry such as access to certain cities? No. After a few quarters, the company continued to grow its top and bottom line earnings - these short term fluctuations proved to be incorrect. Thus the market repriced the company to its earnings relative to competitors in other countries. I love situations like this, and bought it at 73 $ per share, and now it is sitting at 100$ per share, all while paying a 3-4% dividend per year!
Short term fluctuations provide buying opportunities, but don't change my overall worldview *if* the worldview hasn't changed. An example I messed up the short term and structural change was in 2014. In 2014 when the market was oversupplied with oil, a structural change in the market was taking place. This crushed offshore drillers because that particular market was oversupplied. See Transocean's stock price above. This was not a short term fluctuation, and many of the leveraged offshore drillers I thought would come back did not. I thought the change was temporary like it was in 09, but it wasn't. In 09, the Saudi's immediately cut production and as the swing producers at the time, oil production was not able to climb sufficiently, thus resulting in a gradual increase of crude prices to 100 dollars per share. Today, the structural dynamics of the oil markets are much different largely thanks to american shale producers who have managed to innovate - they can pump more oil, quicker at lower costs. Thus any effect of an OPEC cut would be instantly dampened by market forces producing more crude as prices went up. In the realm of value investing, this structural change would be performed in basic analysis - is the industry growing, is there overcapacity, who are the major players? Those sort of questions.
I wanted to quote this because in essence, this is what has guided most successful investors. There are many other success stories like Ed Thorp who used options, or macro guys like Ray Dalio who trade in hundreds of markets. But the commonality between all of them is that their models are based on some fundamentals at some level. Is the per capita GDP growing or contracting? Is the environment inflationary/deflationary? I think that short term fluctuations are like what I described above - simply sentiment based on mostly on fear. I ignore them if they have no basis of reality. For example, brexit caused a nice little dip in the markets - brexit on the short term wouldn't effect my company's long term earnings in any significant way.
As an example of of short term fluctuations in my holdings ( an airport based in Mexico that went down 30% due to trump's election) - how on earth would trump effect an airports earnings? Would fewer people travel to mexico? Unlikely. Would trumps wall effect the airport's barrier to entry such as access to certain cities? No. After a few quarters, the company continued to grow its top and bottom line earnings - these short term fluctuations proved to be incorrect. Thus the market repriced the company to its earnings relative to competitors in other countries. I love situations like this, and bought it at 73 $ per share, and now it is sitting at 100$ per share, all while paying a 3-4% dividend per year!
Short term fluctuations provide buying opportunities, but don't change my overall worldview *if* the worldview hasn't changed. An example I messed up the short term and structural change was in 2014. In 2014 when the market was oversupplied with oil, a structural change in the market was taking place. This crushed offshore drillers because that particular market was oversupplied. See Transocean's stock price above. This was not a short term fluctuation, and many of the leveraged offshore drillers I thought would come back did not. I thought the change was temporary like it was in 09, but it wasn't. In 09, the Saudi's immediately cut production and as the swing producers at the time, oil production was not able to climb sufficiently, thus resulting in a gradual increase of crude prices to 100 dollars per share. Today, the structural dynamics of the oil markets are much different largely thanks to american shale producers who have managed to innovate - they can pump more oil, quicker at lower costs. Thus any effect of an OPEC cut would be instantly dampened by market forces producing more crude as prices went up. In the realm of value investing, this structural change would be performed in basic analysis - is the industry growing, is there overcapacity, who are the major players? Those sort of questions.