Let’s start with an interesting tidbit. At a recent Morningstar conference in the U.S., a leading financial advisor narrated the following tale.
A self-confessed buy-and-hold fanatic, he said he is a believer that the philosophy helps in reducing transaction costs, instills a sense of patience in investors, protects them from over-activity that stems from over-confidence and reduces mistakes and bad decisions that are often a result of short-term or impulsive thinking.
He once advised a new client to buy a certain set of funds and sit pretty. During the next-year review, he asked the client to continue to hold the funds and do nothing. In the following year again, the advisor asked the client to keep holding those funds and asked him to not pay any attention to short-term swings, or “noise”.
The client, who was obviously used to more portfolio activity with his previous advisor, asked him: “If all I need to do is do nothing, why do I need you?” To which, the advisor replied: “You need me to keep you from doing anything.”
Why the Long Term Matters
The above anecdote clearly symbolizes much of what is wrong in the investment industry. While there are only few people in the market (traders) for whom activity is a must, most investors, especially individuals, could do with less activity in their portfolios.
The need to be more active in the market is often projected by an industry (and fuelled by the financial media, which focuses on every minor development in the markets) whose interest lies in having its clients do more, even if it’s often not in their interest--and have them pay more by way of transaction charges and commissions. Imagine a doctor not treating his patient properly so he keeps coming back for further consulting!
Morningstar’s philosophy
Which is why at Morningstar, our research philosophies emphasize strongly on patient, long-term investing. We ask investors to stick to our fund picks over a complete market cycle. For stocks, we ask investors to invest when stocks are trading at discounts to their intrinsic worth and wait till they become fairly valued.
Our stock investing philosophy is simple: each company under our coverage is assigned a fair value (on this basis of a proprietary Morningstar valuation model), which we believe should be the company’s true worth. If the stock price moves away from the fair value, the premium or discount is indicated in the form of a star rating (with a one-star being very over-valued, two being over-valued, three being fairly valued, four being under-valued and five being very under-valued (we ask investors to invest when stocks are trading at five stars and sell when they come down to two or three stars).
So how are stocks trading currently in Morningstar’s coverage universe? Most stocks are currently trading near their fair values with a handful of stocks being slightly overvalued. So while we hate to disappoint you if you were expecting the next great moneymaking opportunity, in the spirit of the famous advisor, we would want to keep you from doing anything and would urge you to hold on to stocks if you bought them cheap.
Meanwhile, check out our Stock Analyst Reports and read our views on the stocks that we cover and make sure to buy them the next time stocks enter the five-star territory. Click here to read more about Morningstar’s equity research process and our Star Rating for stocks.
Registered Morningstar Members gain exclusive access to our complete Analyst Reports, including fair value estimates, consider buying/selling prices, bull and bear breakdowns, and risk analyses. Not a Registered member? Get these reports immediately when you sign up with Morningstar for free.
