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PROPLAN > “Walking your dog on a long leash” Sep 24 2015

Afternoon all,

I know I must sound like a broken record here, but honestly — there is no credible way of knowing what market prices will do in the short term.

None, zero, zilch!


Prices are determined through the interaction of countless, faceless agents. All acting according to their own circumstances and outlook, few of which will relate to your own personal situation. These days, a good deal of the daily volume is merely algorythmic trading, which certainly has nothing to do with the underlying fundamentals of the business.

There’s a very good reason why there are virtually no successful short term traders…at least none with any consistency as to make the practice worthwhile.


All we can say for sure is that share prices reflect business performance over the long term. As such, the most sensible approach is to buy into a great business, whose earnings will (on average) march upwards over time, at prices that are sensible. It sounds boring, and most of the time it is. But if you are discliplined and patient, you will achieve very attractive investment returns.


Remember — we are part owners in real businesses. And our goal should be to partner with those businesses for the long term and share in their success. We are not trying to out smart all the other punters out there and make money on short term volatility. There is a HUGE difference.


If you must look at a chart, look at one that shows the per share earnings performance of the business — NOT the daily change in price.

But if you must, at least look at them in combination. That way you’ll see the relationship on which our entire investment philosophy rests.


Now this is not a recommendation but an example of a company with growing earnings per share (EPS) and how the price eventually follows it up.


Thorn Group (ASX:TGA) for example:

These forecasts are broker consensus (from Morningstar). But the point is that if EPS do keep rising, the price will almost certainly follow; even if that takes some time.


Try this:

Think about a guy walking from Central Station to Treasury Casino. He is walking a dog on a long leash. The dog will dart all over the place — when excited, it will run ahead, when scared it will fall back, and often it will just run about for no good reason at all.

But the point is this. Sooner or later that dog will make it to Treasury Casino, because that’s where his owner is headed and it’s on a leash. The man represents company earnings and the dog is the daily share price.


Most people focus on the dog, but the smart money pays attention to the man, and where he is headed.


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