Stock vs. Business

Investors sometimes ask, ‘This stock has gone down—should you be selling it?’ The short answer is: it depends. We should remember that a stock represents partial ownership in a real company and, as such, should reflect future business fundamentals. Similar to buying an investment property or a farm, any related income and the ultimate sale price generated by that investment should be reflected in the purchase price.

Sometimes, quoted stock prices accurately reflect business fundamentals, sometimes they do not. Think of a potential homebuyer making an offer on a house that is either fair or way outside of the reasonable price range. Much of stock market action is based on its participants’ short-term views and feelings, including fear and exuberance rather than well-reasoned prospects. Over the past few years, for example, prices of our portfolio holdings deviated materially from their fair values, i.e. values that would approximate business fundamentals of each company. In mid-2021, as good economic and market news continued to roll in, some of our holdings were trading well above their fair values prompting us to trim them. During last year’s bear market, many of our holdings traded below our fair value estimates giving us an opportunity to add to them and buy into new positions. 

There are instances when market participants correctly price business prospects. The downfall of Nokia’s and Blackberry’s market positions due to iPhone’s entry into the smartphone market was correctly reflected in the two companies’ stock prices. In recent years, share prices of many brick-and-mortar retailers trended down as e-commerce became more mainstream. Our job, therefore, is to ensure that the multi-year business prospects of our portfolio holdings, including their competitive positions, are strong. As long as we do that, stock prices should eventually follow their business prospects.