Warren Buffett has said that in the short run, the stock market is a voting machine and the long run it is a weighing machine. In the short run. stocks fluctuate based on the mood swings of Mr. Market. In the long run, fundamentals of the business begin to take over.
Buffett has also that investors should let the stock market guide them, not instruct them. Let's consider this idea by Buffett in the context of what happened Tuesday in the stock market.
When I checked the market for the first time Tuesday around 12 p.m. EST, I noticed that the S&P 500 was down by over 35 points, or nearly 2%. The Dow Jones Industrial Average was down nearly 400 points. Oil was down over 1%.
On a day like Tuesday, you would expect that most stocks would be down, perhaps by a wider margin that the overall market. That was indeed the case. On the other hand, the volatility meant nothing to someone who chooses his securities based on a price-to-value basis. And perhaps no industry today provides the biggest opportunity for that discrepancy than the energy sector.
That discrepancy was on display Tuesday. Energy MLP's, perhaps now trading at ridiculous valuations to long-term value, did well. Breitburn Energy (BBEP) was up 6% after climbing over 20% the day before. Shares have fallen by over 75% in the past year, thanks to a declining oil price. Line Energy (LINE) and Memorial Energy Partners (MEMP) also advanced. Energy blue chips like Chesapeake (CHK) and Murphy Oil (MUR) also did well in the volatility.
Even other high quality business that would be ripe for a selloff in a market decline did well. Whole Foods (WFM), trading at 34 times trailing earnings, declined by less than 1% Tuesday. The shares are up nearly 6% year to date, compared with a nearly 3% decline for the S&P 500. Recent spin-off Remy International (REMY), subject of my column Tuesday, was slightly up.
My point is not that one day's performance matter -- it does not. However, taken as a microcosm of a bigger picture, Tuesday's lessons are meaningful. Buying out-of-favor securities at prices well below the value of the business and holding on is going to likely pay off in the long run. When a business is that heavily discounted, the only thing volatility will do is give you a chance to own more of it at an even better price -- in which case the upside becomes even better.