The Efficient Market Hypothesis
Fundamental investors do not believe markets necessarily reflect value right away. We believe in delayed market efficiency. Markets get it right over time, but investment opportunities arise from seeing future value the market has not yet recognized.
Stock prices do not reflect available information. They merely reflect the consensus opinion of what that information means.
Consensus is often wrong and in the short run, so are markets. Furthermore, markets are more and more dominated by traders and software programs that have very short term perspectives. So, their consensus focuses on the short term implications of whatever information is out. Long term investors can take advantage of such inefficiency.
For example, stock prices often go down on news that a company or sector must make investments in order to grow. Spending on investments puts pressure on short term earnings forecast, which more often than not will trigger sell orders from traders.
Think of all the times Amazon sold off because of Jeff Bezos’ obsession with reinvesting whatever profits he can generate. Yet, Mr. Bezos has clearly created a lot of value for patient shareholders.
Value exists when there is a discrepancy between a company’s future and the market’s perception of it. Because market participants are better at predicting short term prospects of a corporation, most investment value lies in the mis-pricing of la company’s long term potential.
A particularly overlooked element in assessing long term value is the compounding effect of returns. Just buying low PE stocks is not the best way to assess value. Valuations based on price earnings ratios, EV/EBITDA or EV/Sales all need to be viewed in relation to a company’s sustainable growth rate.
In that sense, we believe we are value investors and reject the prevalent distinction between “value investors” and “growth investors”.
Setting Clear Goals
When putting together a portfolio, an adviser’s first step is to clearly define one’s objectives. Using that knowledge, he or she will then put together the best possible combination of portfolios.
At Belpointe, our portfolio managers too have clearly stated goals and mandates. These vary from generating reasonable income at low risk to aggressive growth and capital gains.