The first quarter was one of the most volatile quarters for the stock market in recent memory. During the first 12 trading days of the year the S&P 500 Index fell 9.0 percent. This was the largest 12 day percentage decline to start a year in the stock market’s history. The media was very quick to latch onto this fact with headlines such as Reuters proclaiming: “Wall Street Has Worst Start To Year Ever”. (The news media tends to reinforce very short-term thinking that is 180 degrees from our long-term value based investment philosophy.) If this was any other 12 days in the year, would investors have taken much notice? Despite the stock market’s poor start, the S&P 500 Index rallied in the second half of the quarter, posting a 1.4 percent total return for the quarter.

Both of our investment strategies, as indicated in the box above, experienced solid returns during the quarter—outperforming both comparable indices. In light of the huge stock market fluctuations during the quarter, I cannot help but think of the wonderful parable from Ben Graham’s book, The Intelligent Investor. He underlines a long-term value based investment philosophy that looks at each stock as an ownership interest in a business, writing:

“Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly.

If you are a prudent investor or a sensible businessman, will you let Mr. Market’s daily communication determine your view of the value of a $1,000 interest in the enterprise? Only in case you agree with him, or in case you want to trade with him. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low.”

During the quarter we took advantage of Mr. Market’s manic-depressive behavior, selling a couple of holdings that approached our underlying intrinsic value and buying a couple of holdings that were unduly depressed below our estimated intrinsic value. It is this type of patience, discipline and thinking that allows us to ignore the seismic gyrations of the stock market and try to focus on generating attractive long-term returns.


The above post has been excerpted from a recent letter of Granite Value Capital.

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