Report – Ahead of the S&P 500 by 20% over the past 52 weeks!

Investors:

We’re ahead of the S&P 500 by 20% over the past 52 weeks. Here’s an idea where the stock markets have gone during the past year.

Want more control over the chart? Try the Interactive Chart.

Above, you can see a one year chart from August 3rd, 2008—right before the markets went into a free-fall. The blue line represents the S&P 500 while the red line represents the first world international index.

You can see that the lowest levels were hit in March of this year, with the international markets down 50% and the U.S. markets down nearly 45%. But since then, the markets have started to recover. And whether you had invested in the international VEA index one year ago, or the S&P 500 one year ago, your results would be the same. You would be down roughly 20% currently.

As for the investment club, we are currently down 0.5% during that same time period. Any member who added money to the investment club over the past 52 weeks is actually in the black—on paper, you profited between August 2008 and August 2009, despite the market’s 20% decline. If you didn’t add money during that 52 week stretch, then you’re likely down about 3% or so.

Our stocks have been on a relative tear over the past few weeks. And as I’ve mentioned, all but one of them is above our purchase price.

I’ve been really frugal when buying stocks, so we have some very low average prices for our businesses—despite the fact that an absence of deposits kept us from “averaging down” much on our stocks during the downturn. But I still believe that our stocks are priced slightly below what they are currently worth—which makes additional purchases of the same shares a healthy long term proposition despite the recent market rise.

I’m not sure how our holdings will perform over the next year or three. And I don’t care. It’s thoughts like that which prompt people to make mistakes by keeping their eyes on the vicissitudes of the casino.

We have to make purchases from a business perspective, and not based on where we speculate the markets will head in the near future. For this reason, when I see USG at nearly $15, after we have made 40% on the stock, I don’t look at where it has been or where I think it will go in the near future.

From a business perspective, I believe that USG is worth more than $3 billion. When Buffett bought shares of USG, he paid more than double its current share price. Today, it’s selling for less than $1.5 billion. I don’t know when it will sell for $3 billion plus, but as long as it happens sometime within the next seven years or so, we will make a very strong return on this stock. So for the long term, I believe that paying $14 for USG shares is a good deal, even if we have the risk (which we do) of seeing the stock drop to $4 over the next year or so (it might do this, but it might not).

We’re investing from a business perspective, not from a market perspective. The stock market is just there for us to look at to see if anyone is about to do something silly.

Long term, we’ll use it as a determinant of success because it will reflect the intrinsic value of business, but short term, the stock market is a crazy casino that we have to watch with emotional equanimity, while never falling victim to its intoxicated spell.

Speaking of intoxicated spells:

The stock market has always been unpredictable, short term. Despite what you might think about the talking heads on television, they don’t know where the markets will go, and long term studies on forecasts have suggested that nobody ever has been able to predict the short term vicissitudes of the market with any degree of accuracy.

But if the markets take a pounding, and the news is calling for the end of the world as we know it, then buy. This will be a great time to go out on a limb and deposit large sums into the investment club. In fact IT’S SAFER to buy into stock markets trading at low valuations, and it’s RISKY to buy stocks at dumb prices (ie. When price to earnings ratios exceed 23X earnings, or so, it’s just dumb to commit large sums to the markets) We are invested in companies with very little (if any) debt. Our companies can float through a recession—even a depression, in most cases. Nobody will be knocking at their doors asking for money that they can’t afford to pay. And this is rare. Most companies are leveraged with debt, and leveraging can kill during a downturn especially.

It’s best to remember Warren Buffett’s maxim: “Be fearful when others are greedy and greedy when others are fearful”

Thanks,

Andrew

Related posts:

1. Update: Recent Gains Puts Us Ahead of Equity Based Mutual Funds
2. Performance Summary – 23 July 09
3. Investment Club Defies the Odds
4. Investment Club: Current Holdings – the Report in Brief: 16 May 2009