The Old Classics
“The point of investing, after all, is not to have a great story to tell; the point of investing is to make money with limited risk. At some point, investors will drop their Pulitzer prize winning story stocks and revisit their attention on the old classics, stocks that make you money because their undervaluation creates a compelling imbalance between risk and return.” —Seth Klarman (December 2000)
Stock market indices fell a bit last week. The S&P 500 was down 0.26%, and the Nasdaq dropped 1.17%.
Nvidia, which has been helping drive the stock market upward as it has seemingly gone up every single day, was up a few percent again early on Friday, before sharply reversing course and finishing down a few percent on the day.
Nvidia is a great business story. They made a big bet years ago that is paying off handsomely today. And the stock has followed that success upward. The company’s market capitalization has gone from about $10 billion 10 years ago to over $2 trillion today.
But its bright business future isn’t quite so secret or unexpected anymore. The company’s EV/Sales ratio was about 1.5x in 2014, versus about 35x today.
We don’t know what will happen with Nvidia—the business or the stock—in the coming years. But at this valuation, the main justification we’ve seen for people to continue to buy it is that other people continue to buy it, so it’ll probably just keep going up.
Maybe that’s right, maybe that’s wrong.
But if the point of investing—according to the quote from Seth Klarman above—is to make money with limited risk, then valuation should play a factor in buying partial ownership of businesses via the stock market. And when it comes to valuation, buying low and selling high tends to be a better long-term strategy than buying high and hoping to sell even higher.
“We’re only interested in price and value. And that’s what we’re focusing on all the time, and any kind of market movements or anything don’t mean anything.” —Warren Buffett (1998)
“The investment game always involves considering both quality and price. And the trick is to get more quality than you’re paying for in the price. It’s just that simple.” —Charlie Munger (1998)
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