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Understand value to get rich on stocks

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by Peter Switzer

I got the rudest reply to a relevant question on my Sky News Business Channel program last night and it was one of the best answers my viewers could have ever heard.

The perpetrator of this impertinence was Roger Montgomery and I have to admit he does it with a certain degree of respect and impishness.

The question came as a response to a small fall on Wall Street yesterday allegedly based on — if you can believe the experts who often guess why a market has moved in a certain way — renewed concerns about European sovereign debt.

That was an excuse for a day when the market fell and there was no economic data to blame.

(By the way, overnight the Dow was up 46.32 points or 0.45 per cent to 10,387.01 while the S&P 500 was up 7.03 points or 0.64 per cent to 1098.87.)

Rude response

This ‘nothing’ day set the scene for Montgomery’s rude and relevant answer.

My first question to him was: “The market was down today, what’s going on there?”

His reply was: “Who cares?”

Arguably as a television commentator and host of a money/market show, it was a fair question and generally my interview subjects or experts would come up with an answer.

But Montgomery is different.

My answer to his question was: “I care.”

The long-term investor

In reality, I didn’t care too much as I am a long-term investor, however many of my viewers care and this day-to-day interest is OK if they are trading short-term.

Explaining his rudeness, Montgomery said there are those who want day to day transactions — stock brokers for starters — who make money the more shares are bought and sold.

He then did what he loves to do — he lectured or advised in his pastoral care style.

He insisted you can’t run a portfolio or a business “as if you think the sky is going to fall in or the end of the world is coming because you would put all of your money in the bank and nothing would get done”.

The best businesses

In asking him to explain what investment strategy he would recommend for anyone running their own self-managed super fund or creating an investment portfolio he summed it up succinctly.

“You have to ask, 'What are the best businesses?' We have the luxury in the stock market to be able to choose the very best businesses — the ones that will take market share when things are bad and therefore will perform well when times are good and I am going to buy them when they are absolutely cheap.”

Intrinsic value

He argues when the stock market falls it can be a buying opportunity for these great companies, especially if their share price falls below their intrinsic value, which is something he uses as a trigger to buy stocks.

So if the intrinsic value is $4 and the share price is $3, then this is a buying opportunity.

The goal of all share players has to be to learn how to value a company and then let your wallet do the rest.

For advice you can trust, contact Switzer Financial Services.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Thursday, September 09, 2010