The Valor Blog.
Investment News and Views, Direct from Our Team.

Betting on something worth betting on…

Yesterdays “Race that Stops a Nation” was exciting.

Unfortunately I find it difficult to throw away money on this kind of venture. I have previously put down a few bucks just to have a bit of fun, but with a race so open that almost anyone could win, it is not the kind of odds I prefer to play with.

The key point I wanted to make in todays blog is that betting on the horses is not much different from the way many professional punters/ investors invest their clients hard earned money.

The majority of professional investors have a very myopic view on managing money. They generally dont think past the next 12 months when investing. This can be seen by the turnover of managed funds portfolios often around the 100% per annum range.

This hyper activity is crazy.

Betting on what a stock is going to do in the next 12 months does not give very good odds. Even the best betters can’t get much more than 50/50 odds. If you ask a bunch of fund managers whether BHP will be higher in 12 months time, the answers would vary wildly because no one really knows!!

Compare this with the probability of Coke (KO) selling more Coca-Cola’s and putting the price up over the next 5, 10 and 15 years. The probability of this is unbelievably high.

The secret to investing is to wait until the very high probability companies are trading in a range that is worth betting on and then hold them for a very long time. This doesnt happen often.

As Buffett eloquently said:

     The market is designed to transfer money from the active to the patient

When investing, you are looking for horses that win year after year. For decades at a time. Put a punt on when they have a bad race one year because it is more than likely just one bad race.

Walmart was a good example of this. Recently Walmart had the Mexican corruption scandal. Was this terrible offense going to affect the earnings of Walmart significantly over a 5, 10 and 15 year period? Probably not. This gave investors an opportunity to place their bets on a winning horse with fantastic odds that had one bad race.

Many people see the market volatility and get worried about the risks of the ups and downs. When you look through the noise and just see the wonderful companies working hard to grow their earnings over time, you realise that most of the noise in the market is the “punters” (often professional investors) who are betting on very average short term odds.

For those that ventured to their local pub yesterday to watch the race, you may have noticed that the scene looked not dissimilar to the stock market floors of decades ago. People throwing down bets and shouting at screens. The reason for this is because the majority of the market is just punting on short term odds which as a general rule is not an overly productive pastime.