Why market selloffs don’t worry us?
Always seek to understand what you own.
Why market selloffs don’t worry us?
Market Declines are Inevitable
In stock market investing, market declines are inevitable and will almost always happen. In fact approximately ~93% of the time it feels like we are losing, with the market trading below historical highs.
Volatility is the price to pay to be a long-term Investor
Short-term stock price volatility price of admission to pay to be an long-term investor in a rising stock market.
“Stocks always go down faster than they go up. But they always go up more than they go down.” — David Gardner, The Motley Fool
Always focus on the long-term drivers of Stock Market Returns
Understand what are the long term key drivers of stock returns, it is (1) revenues, (2) profits and (3) cash flows, to a far smaller extent, (4) valuation multiples (see chart below).
“Where the long term trend of revenues, profits and cash flows are likely to go, the long term trend of the stock price will likely flow. In the short-term, we have absolutely no idea.”
Underperformance in 2021 thus far, especially in April and May
In 2021 thus far, as of 30 Apr 2021, Vision Capital is flat at +0.1% vs the S&P 500 at +11.5% (see table below).
And as of 7 May 2021, that YTD 2021 underperformance got extended further to -6.8%, vs the S&P 500’s +12.7%.
Unfazed? No.
Are we unfazed? No. Because this is not new, and we have experienced this sort of similar temporary declines and underperformance before.
We remain business-focused investors, not stock-price focused investors. We expect to be able to likely outperform and beat the market over the long-term, which is the only horizon that matters.
But in the interim in the short-term, anything could happen, this underperformance could well continue for weeks, months, quarters. It could even continue for years, though we hope not, but we never know.
Backed by rock solid fundamentals
Because the underlying fundamentals of the majority of our companies, well in excess of 80 businesses, remain rock solid and are growing rapidly, we are not bothered. To illustrate, for the average company (4 charts below):
(1) Revenue grew by +43% YoY
(2) Profits (EBITDA & Net Income) grew +32% YoY & +29% YoY respectively.
(3) Free Cash Flow grew even faster at +193% YoY.
Simple Averaging is probably an underestimate.
Find excellence, buy excellence, hold excellence, add excellence and sell mediocrity, that’s how we invest.
Because we let our winners run high and let them keep compounding over the long-run and concentrate on their own into large positions within our portfolios.
Winners become more and more significant, and losers more and more insignificant, the actual average position-weighted figures (vs a simple average) are likely to skew the numbers even higher.
Growth is our Margin of Safety.
Cheap valuations with slowing growth provides for a short-term margin of safety, but that is not what we seek. Expensive (and paying up) combined with higher, sustainable, & continued re-investable growth can provide a far longer-term margin of safety. That’s what we focus on, the long game.
All investing is value investing seeking a margin of safety, the same concept still applies, the only difference for us is the timeframe and the perspective.
Stocks are businesses, they are not mere numbers on our mobile phone, but fractional ownership stakes in real businesses. Stocks are a partial claim of a business’s profits & cash flows, which grows as it continues to re-invest well, execute well & generate life-changing returns.
9 May 2021 | Eugene Ng | Vision Capital Fund | eugene.ng@visioncapitalfund.co
Find out more about Vision Capital Fund.
You can read my prior Annual Letters for Vision Capital here. If you like to learn more about my new journey with Vision Capital Fund, please email me.
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Check out our book on Investing, “Vision Investing: How We Beat Wall Street & You Can, Too”. We truly believe the individual investor can beat the market over the long run. The book chronicles our entire investment approach. It explains why we invest the way we do, how we invest, what we look out for in the companies, where we find them, and when we invest in them. It is available for purchase via Amazon, currently available in two formats: Paperback and eBook.
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This article is solely for informational purposes and is not an offer or solicitation for the purchase or sale of any security, nor is it to be construed as legal or tax advice. References to securities and strategies are for illustrative purposes only and do not constitute buy or sell recommendations. The information in this report should not be used as the basis for any investment decisions.
We make no representation or warranty as to the accuracy or completeness of the information contained in this report, including third-party data sources. The views expressed are as of the publication date and subject to change at any time.
Hypothetical performance has many significant limitations and no representation is being made that such performance is achievable in the future. Past performance is no guarantee of future performance.