Thursday, January 7, 2016

Playing the Market vs. Owning Companies

Like most investors, my stock portfolio has taken a serious hit since the year 2016 began. Hence I need to remind myself of a few basic facts.

The stock market is an auction market. It is a convenience to be able to trade your stocks for cash, or vice versa, any given moment of most weekdays. But whether you get a fair price depends on the collective bidding of millions of other people and institutions.

As a long term investor, I need to think of myself as a business owner. A stockholder of a number of important companies. In my case, companies that invent, develop, and provide medicines to people.

A slow down in industrial development in China should not affect the long-term earnings of the biotechnology companies I own.

Things can go wrong, like a promising drug candidate failing to pass a clinical trial. Or an older drug that is making money being replaced by a better drug made by a rival, or eventually going generic.

I am willing to sell some of my stocks to fools if I think the auction price of the stock has gotten well beyond its real long-term value.

And I am willing to buy from fools when stocks I want have fallen below a price that is attractive to me.

But what I think has been going on this week is algorithms chasing algorithms. More than half of trading is typically done by computers, on behalf of real people. Algorithms panic easily.

I am not buying right now because I don't have that much cash in my portfolio. Prices have not reached truly bargain-basement levels. It they do, I will likely transfer some funds into my account in order to do some buying.

I like my Biotech portfolio. I believe that certain stocks, notably Gilead, were already undervalued before the sell off began.

As a stockholder in companies with growing drug portfolios, revenues, and profits, I can wait. If the stock price does not reflect the true value of the company, then the company will return some of the profits to stockholders, by reinvesting, stock-buy backs, or my favorite, increasing the dividend.

But there are many styles of trading stocks and investing in companies. Including those computer algorithms.

The American economy seems to be strong despite weakness in the oil and gas sector. That should ultimately allow better healthcare for Americans, and allow people (and the government and insurers) to afford the new miracle drugs my companies have developed and continue to develop.

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