In the past, there was always a moment of silence in Icelanders’ homes when the weather report was read on the radio after the news. This was at a time that the nation lived on agriculture and fishing and the weather was pivotal. Even today, we are very dependent on the weather. Weather forecasts have improved with computers and technology, but the Icelandic weather is still unpredictable. Wouldn’t life be easier if we knew what the weather is going to be like ahead of time? The next days, weeks, and months, even? We could plan all kinds of trips and gatherings around such certainty, or maybe just paint the roof.
Of course, we Icelanders are used to a lot when it comes to the weather. Uncertainty is really the only thing that is always certain, and all our plans take that into account. We set up a big marquee in the garden for the wedding reception just in case it rains, and many of us have shovels in our cars – in case we need to shovel snow. We are usually prepared for the worst. If you are planning to drive to Ísafjörður in January, you better have a four-wheel drive car, on studded tires, and with a big snow shovel in the trunk.
It’s certainly not very original to compare the weather to the stock market and the car to a company. But it’s still a useful analogy. Many people spend their time trying to predict the market, which has similar results as making long term weather forecasts. This is the wrong approach. Instead of focusing on the weather, we should think about the vehicle that is supposed to get us to our destination. That is to say, spend more time choosing the car than reading weather forecasts. Similarly, the key to success in investments is to spend your time choosing good companies that are well equipped to withstand the ups and downs of the market.
It is clear that it is not a lack of information that limits future predictions. As an investor myself, I can attest that the flow of information to those who are buying and selling stocks is immense. It is not possible for an ordinary person to read all the information that all kinds of news sources pump out about world affairs that could possibly affect stock prices. The danger is that trying to react to world news or invest according to how the stock market is behaving at any given time, will not be successful in the long term. In spite of that, the reality is that the discussion is usually about the weather (the stock market,) and not the car (the company.) When business operations are discussed in the media, only a few key figures are highlighted from last year’s financial statements, which says very little about the company’s current or future operations, let alone having the company’s operations put in context with other similar companies. Such a comparison would be a much clearer indicator on how the company is doing, especially if that comparison were also put into context with foreign companies.
There are many things that can affect the price of stocks. And the stock market is not always consistent – at least it doesn’t appear to be. Stock prices can go up when people start to have faith in a company after something happens, herd behaviour occurs, and it can go down if a large shareholder simply decides to sell their stake in the company. What is often the biggest surprise is when companies deliver good results for a certain period, but then tend to decline. This is usually caused by the fact that, despite good results, the market forces believe they can see – with an emphasis on believe – that something in the future will have a negative impact on the company’s operations. This could be an increase in interest rates, a change in consumption habits, increased competition, a change in legislation that affects the company, and so on. This can also be the other way around, i.e. a company produces bad results, but the price of its shares rises. The reason here is the same – market forces believe they see something in the future that affects the company’s stock price.
Charlie Munger, the former vice chairman of Berkshire Hathaway and longtime business partner of Warren Buffett, who recently passed away at the age of 99, is often quoted in this context. He makes it a point to focus on understanding a company (the car,) having safety (the tarp, the studded tires, and the shovel,) and being patient in the market.
It is therefore important, when people decide to invest in a company, that they look at the basic operations of the company and compare the operations with companies in similar operations. It is also important to examine how the company is prepared for impending crises, such as wars, epidemics, technological revolutions, and economic crises.
