Ben Graham's old saying (cited on occasion by Warren Buffett) about how the market is a voting machine in the short-term, but a weighing machine in the long-term, has understandably been getting a lot of airtime as equity markets have tumbled over the last few weeks.
But during a fast-moving crisis such as the current one -- or for that matter, the 2008/2009 financial crisis -- the "voting machine" aspect of short-term movements can make the experience of buying quality companies that possess secular growth drivers and have been heavily sold off a deeply humbling one, as additional bad news arrives that sparks a fresh round of selling in good and bad companies alike.
That has undoubtedly been the case when it comes to buying the dip (really, buying the plunge) with many quality tech companies over the last several trading days. While the arrival of good news, such as Fed actions, the floating of major stimulus proposals and the belated emergence of a more aggressive federal response to the COVID-19 outbreak, have helped markets rally at times, such moves have been collectively eclipsed by the selling sparked by a litany of bad news, as COVID-19 case counts swell in the U.S. and Europe and the measures enacted to slow COVID-19's spread cause massive economic and social disruption.
For investors in tech companies, this bad news has naturally fueled concerns about short-term plunges in consumer and enterprise tech spending, as well as about the impact of shutdowns to chip and hardware manufacturing plants.
And with more bad news about COVID-19's spread likely to arrive over the next couple of weeks, equity markets could continue to get roiled in the very near-term. The situation in densely-populated New York City, which had more than 1,800 confirmed cases as of Wednesday evening, looks especially worrisome, and what has been reported by medical professionals about shortages of ventilators and other items needed to deal with a surge in COVID-19 cases requiring hospital admission has been troubling as well.
At the same time, the dramatic reduction in new case counts that has been seen in China and South Korea in recent weeks provides some reason to be optimistic that (with the help of the kinds of aggressive actions that are now being taken in the U.S. and Europe) conditions will look better a couple months from now. The progress that has been made towards developing COVID-19 treatments also acts a reason for hope, as does the upcoming arrival of warmer weather.
And as this exceptional period in American history continues unfolding, investors need to keep in mind that markets are forward-looking. As was the case in 2009, the low point for investor sentiment will almost certainly happen before conditions begin markedly improving on the ground.
Meanwhile, though it's often impossible to value companies based on their near-term earnings and free cash flow estimates in an environment such as this one, a look at the enterprise values now granted to so many quality tech companies -- from Amazon.com (AMZN) and Apple (AAPL) , to Lam Research (LRCX) and NXP Semiconductors (NXPI) , to InterActiveCorp (IAC) and Dropbox (DBX) , makes it clear that their long-term cash flows are quite likely to justify their current valuations even if the next 2-to-3 months are very painful and followed by a gradual rebound over the rest of 2020.
Thus while it's entirely possible that these companies and others will end up trading at even bigger discounts to their long-term earnings and FCF power before the dust settles, it's probably best not to wager on the fire sale lasting too long.
This article has been corrected to note that the saying, "In the short run, the market is a voting machine but in the long run, it is a weighing machine," was originally from Ben Graham, rather than Warren Buffett.
