August 10, 2011 (DJIA 10872.14, SPX 1140.95)

Quick update and our strategy as the markets have corrected > 20%

I wanted to give you a very quick update on some of the market conditions, and our strategy. This note is in response to the extensive economic news of our economy, the world economy, the recent downgrade of USA credit by S&P (as well as one of China’s credit rating agencies), and the recent events and actions of the US Government in relation to our debt ceiling and deficit.

As you know the markets have been suffering a correction since around April 30, 2011. We have been studying the economy and our investments a great deal. Had we known the markets would correct 20%+, we would have exited our positions. Yet, even with turmoil, one can not know the markets direction over the short term. Our portfolios remain invested in companies that typically have strong balance sheets, sustainable business models, and are priced at historically low multiples. Two of our larger holdings have S&P credit ratings that are higher than the USA. Exxon and Microsoft each carry Standard and Poors ratings of AAA, whereas the USA carries a AA+ rating.

I think (but do not promise) that this is a typical correction. Fear is certainly rampant, and if you recall, we have always invested with the Buffett motto of “You want to be greedy when others are fearful.”

We think (but do not promise) that our portfolios will prosper over the long term. We liken an investor to that of a strong swimmer. When a strong swimmer is in the ocean, and a large unexpected wave comes, the swimmer does not fight and flail their arms in the wave. The swimmer waits for calmness to arrive, and goes upon their way in the water. This is what one should do in investing.

The following is a collection of some Peter Lynch quotes I found most appropriate now.

“A sharp market decline is the historical norm.”

“Market declines are great opportunities to buy stocks in companies you like.”

“Trying to predict the market direction is nearly impossible.”

“There is always something to worry about.”

“I’m more interested in how many stocks went up versus how many went down. These so-called advance/decline numbers paint a more realistic picture.”

“When you sell in desperation, you always sell cheap.”

“In spite of crashes, depressions, wars, recessions, ten different presidential administrations, and numerous changes in skirt lengths, stocks in general have paid off fifteen times as well as corporate bonds, and well over thirty times better than Treasury bills.”

“I’d love to be warned before we go into a recession, so I could adjust my portfolio. But the odds of me figuring it out are nil.” “The trouble is the bells never go off. Remember, things are never clear until it’s too late.”

The following are a few sections on our website, which could be helpful in reminding you about long term investing, and the norm of recessions and market corrections.

Wisdom of Great Investors Link

Warren Buffett Page of various articles or transcripts Link

Peter Lynch section of our site Link
Please let me know if you want to discuss any of your finances, portfolios, or anything like that.

I hope you enjoy the rest of your summer!