The Value View 4-24-2104. Silly Season is upon us

The Value View is back after a short break. Last week I took the week off and for the first time in at least the last decade it was not a working vacation. I allowed myself two market checks a day to make sure nothing of a horrible or wonderful nature had occurred that needed to be dealt with and other than that ignored the overall news and market movements. The only news I followed closely all week was related to fishing reports and baseball. It was a nice change of pace from the usual working in a nice hotel room while everyone else does cool stuff vacation of the past. As I told subscribers to the newsletters when I returned it is something everyone should do once in a while. It was incredible relaxing and mind clearing. Fortunately the deep value approach to investing does not require being hunched over the screen every minute of every day.

We are now into the heart of earnings season and we are seeing the quarterly silliness dominate news and trading activity. Reports are mixed but I think we are over all seeing a slight negative bias so far. Tens, if not hundreds of billions of dollars are being bet on how close companies come to the always highly accurate analysts estimates and I suspect that the bulk of it will end it up in the hands of the few really good short term traders in the world. Most individuals will simply be making donations to the rocket scientists and supercomputing crowd that dominate the short term trading and options markets. It is a really silly way to trade in my opinion.

It is even sillier to base our capital markets on meeting a short term number. Far too many companies manage to the number and use things like layoffs and buybacks that are both financially and socially destructive to make or exceed the estimates. It is no way to run a company and I suspect that the fascination and focus on short term numbers works against the long term interests of the corporation and its shareholders and is a drag on the economy to some degree. Business, like sound investing, is a long term proposition and should be managed in that fashion, not to maximize bonuses by buying back over priced shares and firing a bunch of employees to beat the number and pump the stock price.

Earnings season does provide us a snapshot of how our portfolio companies are doing but it is just part of the long term puzzle. It is useful in spotting trends that may indicate a worsening position and reveal causes for concern and caution. Sometimes we get a wonderful surprise with better than expected conditions that leads to a sustained price increase that carries shares to full value. Most of them time for deep value investors it is just one snapshot of business condition changes within the context of a long holding period.

The real value of earnings season for long term value investors like us is that inevitably some quality company will miss the always highly accurate analyst estimates and overly panicked investors will dump the stock and the price will tumble to bargain levels. Pretty much every quarter we get a stock that tumbles and gets added to the portfolio. Last quarter it was Boardwalk Pipeline Partners and we have already seen our holdings in that wonderful collection of assets climb by 25% since investors pushed down after earnings miss and dividend cut. I haven’t found this quarter’s candidate but have little doubt there will be at least one battered bargain stock added to he portfolio before silly season is over.

As Ben Graham said in the Intelligent Investor investing works best when it is most businesslike. Betting on short term earnings performance has far more in common with the racetrack that long term investing and most folks should avoid the temptation. At least at the track you can get a tan and have a cold beer or two. It does make sense from a business point of view to take advantage of others mistakes and buy quality assets on the cheap when the opportunity presents itself. That’s where I will focus my attention and efforts as earnings season plays out.

Cheers,

Tim

Song of the week: The earnings season song

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