Don’t let short-term noise derail your portfolio. Smart investors focus on the future—the long game.
KEY TAKEAWAYS
MY TAKE
Are we there yet? Wait, is it only February? I am not sure about you, but I feel, based on my sore feet (and other various, sundry parts of my body) that we must be somewhere in June already. Yeah, it’s been that kind of start to the year. Ok, not a minute to waste.
Yesterday morning, I had a quick chat with an old friend about “the long game.” He admitted that he was no finance expert, but by playing the long game, he and his wife were set for retirement. Now, I know that it seems obvious to you, but the question is, do you—can you—play the long game?
We live in a world of lofty expectations. We want everything, and we want it NOW. Now, before you x out of this blogpost thinking that I am going to scold you for being a gluttonous hedonist, hang on a second, I am not. It’s ok to want to more. It is what drives us. It is one of the foundational assumptions in economics. More is good. Without it, the wheel may never have been invented. The microwave—come on, you know you can’t live without it. All that aside, that basic, atavistic behavior is what drives the economy and the markets. But here is the thing, having that quenchless drive does not guarantee you success in the markets.
When you buy a stock, you start with a thesis. Something like. “I like this stock because I believe it is in a fast-growing and sustainable industry.” Then we roll up our sleeves. Is management capable? Are the financials solid compared to its competitors? What, no direct competitors? Think again about your thesis; it is rare for such a large market opportunity to have no competition, but if your thesis still holds, keep digging.
It is possible that the company you are looking at has a large first mover advantage. It is feasible that the company found the market opportunity before anyone else. It did? Great, now can the company sustain its advantage? In other words, have they taken steps to build a wide moat around its business in order to stave off an invasion? Do they have some secret sauce, patent protection, copyrights, proprietary know-how? Have they secured their supply lines?
Wow! They all check out. You buy the stock because you believe it has great growth prospects for the future. It will not only grow with the market, but it will always remain a sizable penetration because of its moat, but also through continued innovation. Now what?
You monitor the company’s health, and all is going as planned. In fact, the market is growing even faster than you originally thought. Adoption of the product or service starts accelerating. Your company, as you expected, has maintained its share and even thwarted off several competitors. It not only continues to grow with the market, but it figures out how to get more profit out of sales through efficiency—it is even more profitable. It finds new ways to leverage its competence to gain access to new revenue streams. All this adds up to a company that is poised for high growth. This is a growth company.
Some smart analyst comes along and builds a really complex spreadsheet based on the company’s current financials. They take the time to break down all of the company’s revenue sources, costs, and expenses. They gather as much information as the company will provide them. The analyst then carefully crafts a growth plan over the next few quarters. The growth will be based on what the analysts and other experts think about the target market’s growth. Sometimes, the company itself will give analysts guidance on what it hopes to achieve in the current quarter and ultimately the current year.
Now the analyst must make assumptions on whether that growth will be increasing (hopefully), decreasing, or unchanged over the two years beyond this year. Why only three years? Because, really, who knows what will be with the economy and this budding market in three years, but at least we can give an educated guess. The analyst can’t stop there, though. They must calculate what the company will be worth in that year, three years from now, based on what happens from that point… UNTIL THE END OF TIME.
The analyst then puts all that into a present value equation, which also relies on interest rates, to come up with a theoretical stock value. It should be equal to where the stock is trading today, but it rarely—it NEVER does. After some tweaking, the analyst comes up with a number that they are comfortable with. If it’s lower than the market, the company will get a HOLD or SELL rating. If the number is higher than the current market, guess what, it gets a BUY rating, and the analyst will even publish a target price, but only a year ahead. The analyst is comfortable with the projection, because it is largely based on what the company has shared with them. But as you know, things don’t always work out as planned in business. You know, stuff happens.
Companies, therefore, always give themselves a cushion by lowering analysts’ expectations. Remember, this company is going after a fast-growing, relatively new and misunderstood market, so the analyst must constantly stay on their toes adjusting the model with every bit of new information that comes in. The best haul of information happens in earnings announcements, when not only can the analysts see if the company cleared the hurdle, but what the company expects in the next 2 months and any changes to its end-of-year projections. The analyst plugs those numbers into the big spreadsheet and recalculates. Repeat, repeat, repeat.
AND now we get the crux of it. What if the company misses the analyst’s projection? What if the company lowers its earlier guidance for yearend revenue? Do you sell the stock? Well, the first thing you need to ask is WHY the company missed estimates or lowered guidance. Is it because management is failing to maintain the company’s competitive advantage? Have competitors eroded the company’s market share? Is the market not growing as fast as originally thought. Are the financials still solid? Here is the obvious, but most important pro tip. Go back to your original investment thesis. DOES IT STILL HOLD? The analyst, based on new information has just lowered the company’s 1-year target by a bit. Do you sell? Has the analyst said anything that challenges your thesis? If not, keep calm, and carry on.
Now, we are in the middle of earnings season. Expectations are high and nerves are thin. There are lots of macro factors that are all over the place with a new administration and a once-again cautious Fed. Expectations are high after two years of outstanding market returns and you have been incorrectly told that markets can’t keep going up. Sure, they can, but that doesn't mean that they will.
Five of the Magnificent-7 that blazed trails for last year’s great returns have announced earnings. As you might guess the bar was really high. They are all considered expensive in one way or another. Most of their hurdles have been cleared, and the misses, if any, could be easily lost in rounding errors. Most of these Mag-7 stocks derive their power and growth prospects from—you guessed it—AI and the ecosystem around it.
We learned last week that there are some new competitors entering the market. I am on the record as saying that the competition will strengthen the prospects of the incumbents, and certainly the broader ecosystem that is still critical. Your company announces that it fell slightly short of what analysts were expecting on average. You go through your routine and find nothing obviously wrong. You go back to your thesis, and it holds.
Stop thinking about what the stock may do tomorrow. You are a long-term investor. Where will that stock be in 3, 5, or even 10 years from now? Now, you may need to have access to your cash in the near future, meaning you may have to sell some stock. If that is the case and you are worried about what will happen tomorrow, that volatile stock may not have been the right one in the first place. But if you can play the long game, relax, and go against your primeval instinct to panic and sell. Use your time more productively. You will be happy and secure, just like my old friend.
YESTERDAY’S MARKETS
Stocks traded higher yesterday helped by some still-not-gone AI optimism, which was helped by secret-agent, AI-wielding Palantir. No new developments on the smoldering trade war or tariffs gave bulls a chance to stretch their legs. Fed speakers are talking a lot about “caution”, taking the pass from the markets, sending rate-cut hopes further and further out.
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