In his latest 2021 Annual Report, Francis Chou warns investors to ignore the narratives. Here’s an excerpt from the letter:
When the stock is that cheap, assuming that you don’t own any shares, a rational investor should back up the truck and buy every share that is offered in the market. But what makes it difficult for some investors to buy is not the rational side of his mind but more the psychological aspect of it. In the stock market, you are bombarded with noises that affect a person’s rationality.
It can get radically altered. Stock prices can move unrelated to the fundamentals of a business. During a bull market, you may see several stocks trading at anywhere from 50 times going to more than 100 times earnings, and conversely, there can be several stocks sold at 10 times earnings going down to below five times earnings.
The fundamentals of the company are ignored and, instead, investors are transfixed on the price movements of the last couple of years. Then new narratives are written most convincingly on why these are the new paradigms, and why they are not worth giving weights and considerations to what the assets are worth and what the company can earn over several years.
I remember talking to one value manager in 1999 when the tech stocks were in full bloom. He said, “I have a family to feed and I will keep losing assets if I don’t accept the new headlines and paradigms. Sticking to buying companies that are undervalued is not the way to be successful in the long run”. He changed his philosophy before the tech stocks were about to go into a severe decline over the next couple of years.
One question that keeps popping up is with regard to the current crop of tech companies like Facebook, Apple, and Alphabet. Based on the current interest rate, they are not overvalued. We also admit that we totally misjudged the valuation of these three companies 10 years ago. Metaphorically speaking, when we thought it was worth US$100 per share, in fact, it was worth closer to US$200 per share. Unfortunately, we also made some mistakes in evaluating mediocre companies. When we thought a company’s share was worth US$100 per share, it was actually closer to US$60 per share.
You can read the entire letter here:
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