**Dear Reader, I hope you enjoy this article. - Vitaliy**
Watercolor "
**Colorado Autumn**" is by my father, Naum Katsenelson
How A Stock Market Turns Investors Into Gamblers
Don't let this wave of stock-market volatility go to your head. The
value of the companies in your portfolio doesn't change by a positive
or negative 5% three times a day. Get the value right and the price will
follow.
For example, my firm recently met with a prospective client, a physicist
who has made millions of dollars by owning apartment buildings in the
U.S. and Canada. He confessed that he never was able to make much money
in stocks. As we talked to him we observed why. The Dow was having one
of those 500-points up and 500-points down days. He was visibly happier
when the Dow was going up and sadder as it was going down.
People who are otherwise successful as businessmen and as investors in
private businesses or real estate change their behavior completely when
they enter the stock market. I have a friend whose father has made
hundreds of millions of dollars by building several companies from
scratch in Mexico. An absolutely brilliant businessman - and the worst
stock investor ever. He'd fret about every move in his stock
portfolio.
As we talked to the physicist we used this analogy: What we (or any
rational investor) do is not much different from buying an apartment
building. First you look at the quality - how well the building is
built, the location and demographic trends in the area, and so on. Then
you start valuing this building. You formulate your best-case and
worst-case scenarios for rents, occupancy, property taxes, and other
important variables - price to square-foot, price-per-bedroom, price
to worst-case rent. In the stock market these shortcuts are price to
earnings, price to cash-flows, price to book-value.
If the price of the apartment building is at or below your worst-case
scenario, you buy the building. If not, you move on. This is a rational,
businesslike way of valuing an apartment building or any asset,
including a publicly traded one.
Yet there are two important differences between an apartment building
(or a private business) and a publicly traded company: The latter offers
instant liquidity and low transaction costs. These differences should be
huge advantages. To sell an apartment building may take months or years.
Transaction costs are enormous: 3%-7% of the building's value to buy
and to sell ("in" and "out" costs combined could be as high as 6%-14%).
The stock market should be a paradise for an apartment investor or
businessman. Instead of having to deal with tenants and local
authorities, you buy stocks or even an apartment REIT (real estate
investment trust) that owns hundreds of apartment buildings (arguably
reducing the risk of owning a single building). The REIT is run by
professional management (in this case the definition of professional is
that they get paid). You can let them deal with tenants. Of course, you
have to analyze the REIT's management to make sure that they are
competent and properly incentivized, but this analysis is not much
different from what a businessperson would do when hiring a manager of
an apartment building.
So, you can do the same analysis you performed on an individual
apartment building on this REIT, except - and here is where we enter
into the domain of public equities and the rational person is replaced
by an irrational one. Stocks are priced every second of the trading day.
Thousands of times a day someone tells you, this company is worth this
much. Actually, this is not what they tell you; this is what you hear.
What they tell you is "I would buy or sell this company for this much at
this moment." There are a million reasons why someone might want to buy
or sell a stock on any given day. A lot of them have nothing to do with
a company's value. So yes, there is a difference between value and
price. You only know the difference if you've spent the time to value
the company.
If your apartment building was a public stock its price would fluctuate
daily, and most of the fluctuation would just be noise. The price would
be moving based on local weather, employment, highway traffic, a mayoral
race - the list is long. A lot of these factors will be transient and
random in nature - in a word, noise. If a building similar to yours is
put on the market at a ridiculously low price by a forced seller, you
are not going to be upset that your building is now probably worth less,
you'll see it as an opportunity to buy another building on the cheap.
That is rational, businesslike behavior.
The liquidity of the stock market and its negligible transaction costs
are great features, but probably do most people more harm than good.
They can turn even most otherwise astute private investors into
degenerate gamblers on a daily basis. The difference between a gambler
and a degenerate gambler: the gambler plays with as much money as he can
afford to lose; the degenerate gambler puts everything on the line.
When you gamble in the stock market with all of your life savings, you
are a degenerate gambler. That's why it's important to focus on what
businesses are worth, not how the market prices them.
http://contrarianedge.acemlnc.com/lt.php?s=57dbe3454bfb73d1c343855bbc5bc44f&i=1047A1099A28A11137
Digital Painting is by my brother Alex Katsenelson
Ravel - Piano Concerto in G minor
Today I want to share with you the second movement of the Piano Concerto
in G minor by French composer Maurice Ravel (1875-1937). Ravel was
considered a French Impressionist - a term he rejected. We usually
associate the term with visual art, not music. Nevertheless, Claude
Monet and other Impressionist painter broke the rules of the artistic
establishment of that era, and Ravel had a similar effect on the musical
world.
This concerto is unlike any other - it exists in a very different
dimension. It is infused with both Mozart's lightness and clarity and
the brightness and spontaneity of jazz which was very popular in France
in the early 1900s and which Ravel was further exposed to on his visit
to the US in 1928. I am sharing with you the second movement only,
because that is by far my favorite part of this concerto.
Click here to listen
**Vitaliy Katsenelson, CFA**
Student of Life
I am the CEO at IMA, which is anything but your average investment firm.
(Why? Get our company brochure here
, or simply visit our website
).
In a brief moment of senility, Forbes magazine called me "the new
Benjamin Graham."
I've written two books on investing, which
were published by John Wiley & Sons and have been translated into eight
languages. (I'm working on a third - you can read a chapter from it,
titled "The 6 Commandments of Value Investing" here
).
And if you prefer listening, audio versions of my articles are published
weekly at investor.fm .
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