April 3, 2020 – Frank Mullen, portfolio manager
Volatility has been a constant in capital markets throughout history. Most years, investors foresee a risk to the economy and its underlying businesses, and they react to short-term views by selling investments and driving the price lower. Many view these movements as investment risk. We, however, choose to view them as opportunity, and we have written extensively about the topic.
A quick change in the price of an investment merely reflects the hurried opinion of the masses. It’s our job as fundamental analysts to apply our own logic and analysis to the situation, then develop our own view. We often agree with the market, but there are times when we think the market is missing something and is valuing a business with far too much pessimism. We fail to see how this is a risk. Identifying a business that’s being offered at a low price because of others’ misguided fears is an opportunity. What would you do if a brand new Honda Civic had its price slashed from $25,000 to $10,000? Would that be a risk or an opportunity? If you were car shopping, you’d know the value of a Civic is greater than $10,000 and would buy it as quickly as you could.
As investors, our job is to value businesses. We need to understand the long-term drivers of a business’s profitability and use the forecasted future profits to come up with a value. When the market offers us an opportunity to buy businesses significantly below our valuation, it’s an opportunity. It’s an opportunity to make a potentially great investment and compound wealth.
Read the rest of Frank’s commentary here>>EdgePoint 1st Quarter Commentary (2)