In the long run the market is a weighing machine, not a voting machine in 2001

by Ashik Shah on 16 August 2001

World equity markets have declined and faced considerable volatility. Kurm has been quite successful in preserving and growing capital, as compared to the indices. While difficult at times, our strategy of avoiding the herd mentality of the crowd, of focusing instead on underlying business values, is now beginning to pay off.

The insurance industry is continuing to benefit from improving rates, making our investments in low-cost operators more profitable. As rates rise, insurees shop around for the lowest cost provider, leading to larger volumes at, for example, Mercury General and Geico, a subsidiary of Warren Buffett’s Berkshire Hathaway. In fact, in the last quarter alone, Berkshire generated just under $3 billion in “float,” from insurance with costs likely to be paid after a medium to long period of time, effectively a low cost source of funds.

With fears of recession, and lower equity markets, there are more opportunities to deploy such funds. In fact, several of our investees are themselves investors, specialising in taking advantage of such situations. While equity markets have suffered, valuations for medium sized businesses have fared even more badly, presenting further opportunities. Specialists in “vulture” investment or in turning businesses around, such as Leucadia, have already begun to find the environment more interesting.

Kurm is thus likely to benefit greatly from the fear and uncertainty prevalent today. As they say: we should be “fearful when others are greedy, and greedy when others are fearful.”

The core values should never be forgotten: thinking of shares as pieces of business and not as commodities for speculation; and always investing with a “margin of safety”, a cushion to prevent loss in the case of mistakes. Ultimately, as argued by Benjamin Graham, “in the long-run, the market is a weighing machine, not a voting machine”. Even if it is popular, a share with no earnings and no intrinsic value “weighs” nothing and will be worth nothing.

Kurm’s investments are in well-capitalised companies with long histories of profitability, from satisfying customer needs, or from shrewd investment strategies, run by honest, motivated owner-managers whose interests are aligned with ours as shareholders. This is how to preserve capital and make it grow.

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The views expressed and comments made on this website are not personal advice based on your circumstances. The purpose of this website is to provide information and analysis to help you make your own informed investment decisions. If you are not confident making your own investment decisions you should contact a firm which is authorised and regulated by the Financial Conduct Authority (such as Ashik Shah & Co. Ltd.) so that a qualified financial adviser, after considering your personal circumstances and investment objectives, can make personal recommendations of investments which are suitable for you. Whether you make your own investment decisions or prefer to follow the recommendations of a financial adviser you should always remember that your capital will be at risk and that investments can go down in value as well as up.

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