Smart Investing


December 2, 2011


Looking past 'Buy' and 'Sell' ratings

Over the past few weeks, the market has been particularly volatile and has seemingly made bigger drops than gains.

Much of this short-term movement is a result of analysts' "Buy" or "Sell" recommendations and their comments. Based on a recent Bloomberg survey of 212 firms, the analyst community is wrong more than right.

Since the beginning of 2009 to Aug. 31 of this year, the 212 firms that are part of the ranking got 1.3 stock recommendations correct out of every 16. Keep in mind these analysts are some pretty smart people, but trying to predict in the short term what will happen in the market is a fool’s game.

Analysts' "Buy" and "Sell" recommendations are areas I never look at when buying or selling any companies. This is also why, when I’m looking at the analysts' estimate on the earnings per share, I look at the mean of all the analysts, and I couldn't care less about what one analyst or another says individually.

When analysts get the earnings per share numbers going forward, it comes many times from the company that is giving guidance. I do realize that even the companies and their CEOs and CFOs are not perfect in predicting the future, but with the company executives' guidance and a mean estimate of seven or so analysts, many times they can come close.

But even they don’t look at the stock prices day to day just because some analyst put a "Buy" or "Sell" rating on the stock. It may move the stock that day, but over the next six to 12 months, it has no bearing on the real value of the company.

I read this past week that Warren Buffett is on a buying binge. Having seen the price at which many companies are trading, I completely understand.

But then, I wonder why Buffett is buying when everyone isn’t? He has the best long-term track record for investing, so if he is investing, why aren’t you? You might say that he has all that money, so he can afford to lose some and you can’t. But Buffett does not invest to lose money.

The difference is that you may invest your money, and then when the market goes down the next week or two, you may feel bad or, even worse, panic and pull your money out. Buffett would never do that, because when he invests, he doesn’t look at the investment the next day or even the next month to see how much he made or lost. He invests in quality companies that are making money in earnings and cash flow, no matter the market price of that company in the short term.

Please be aware that in the third quarter, when you may have been worried about Europe, Greece or who knows what, Buffett invested $23.9 billion, the most in at least 15 years.

We also hear how bad the banks are, but one of Buffett’s largest investments is in a bank stock, Wells Fargo, and he also owns a large amount of American Express.

Neither he nor I can tell you when the bank's stocks will turn around and go up. What he sees, and what I can tell you, is that there is a lot of value in bank stocks. Rather than trying to “time the bottom" to buy, I would rather buy and own these bank stocks at a reasonably good price and hold the quality ones through the current storm we are in. By the way, most of the banks are making money and will continue to do so.

Think about this: If Buffett were your father or brother, or just a friend, and you knew him personally and he told you he was buying the banks, or that he was investing his money now and you should too, would you listen?

Based on my research, this is a great time to be investing in quality companies after you’ve done the research. It is a terrible time to be in cash or bonds, and anyone thinking of selling would have regrets, come next year.

The holidays are here, so enjoy them, invest your money, and don’t worry about Europe or Greece or whatever else comes up. Enjoy the time with your family and sleep well at night with your smart investments.

Wilsey is president of Wilsey Asset Management and can be heard every Saturday at 8 a.m. on KFMB AM760. Information is provided by Reuters.


December 2, 2011