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.

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

This newsletter contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized investment advice. Past performance is no guarantee of future results. There is no guarantee that the views and opinions expressed in this newsletter will come to pass. Investing in the stock market involves the potential for gains and the risk of losses and may not be suitable for all investors. Information presented herein is subject to change without notice and should not be considered as a solicitation to buy or sell any security. Any information prepared by any unaffiliated third party, whether linked to this newsletter or incorporated herein, is included for informational purposes only, and no representation is made as to the accuracy, timeliness, suitability, completeness, or relevance of that information. Granite Value Capital, LLC is an SEC registered investment adviser with its principal place of business in Hanover, NH. Granite Value Capital and its representatives are in compliance with the current notice filing requirements imposed upon registered investment advisers by those states in which Granite Value Capital maintains clients. Granite Value Capital may only transact business in those states in which it is notice filed, or qualifies for an exemption or exclusion from notice filing requirements. This newsletter is limited to the dissemination of general information pertaining to its investment advisory services. Any subsequent, direct communication by Granite Value Capital with a prospective client shall be conducted by a representative that is either registered or qualifies for an exemption or exclusion from registration in the state where the prospective client resides. For information pertaining to the registration status of Granite Value Capital, please contact Granite Value Capital or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov).