After writing the post on investing in the oil majors (if you can call it that – I’m genuinely sorry about reaching almost 6,100 words as I didn’t plan on making it so lengthy) – explaining how you’re being paid to absorb volatility over very long periods of time that other people don’t want on their balance sheets; that we could very well watch some of these business collapse another 30%, 40% or more, but that doesn’t particularly matter much to a long-term investor who thinks the shares are objectively cheap on an absolute value and possesses both the emotional fortitude and financial resources to hang on for decades – by sheer happenstance, I came across an interview from Louis Rukeyser’s old show. A then-38 year old Peter Lynch talked about how he learned the importance of not buying something simply because it went down in market price. He had been seduced by Standard Oil of Ohio, now part of BP, after it fell by 33%. He then watched it collapse further until it was down 67%. If you think it can’t go lower: It can.
Rukeyser: What would you tell them [average investors] not to do?
Lynch: There’s a common mistake, people buy stocks because they’ve fallen from price X to two thirds of X or half of X. On that basis alone, they’re buying the stock. That’s called bottom fishing the stock market. It’s very, very difficult. I had a rough go of it. Standard Oil of Ohio shares fell this year from 90 to 60 and I told everybody this stock is not going to go any lower. Then it went to 50. I said this it, no lower. As it went through 40, I said to people, this is it. Finally when it got down under 30, and people said what do you think of Standard Oil of Ohio? I said: “What does Standard Oil of Ohio do? I don’t know that company.” I absolutely backed away from it.
Rukeyser: You didn’t like to buy low.
[mainbodyad]
Reader Comments (9)
Comments are presented chronologically, with replies indented beneath the comments to which they respond.
Edward Lubin
August 27, 2015
Please, Joshua, please do not apologize for writing what amounts to the ideal introductory thesis for interested beginners on the critical difference between the two principal personal finance strategies: value investing for the long term, and "playing" the market for all the quirky roller coaster ups and downs that the news of the day brings. With in-depth careful research and a laser focus, you make the case that the investor who understands the fundamentals of his sector and who recognizes he is financially remunerated for absorbing its unique market volatility is rewarded with financial security.
In my opinion the biggest social catastrophe of a generation occurred with the disappearance of defined benefits. We have insurance for everything except our financial well-being in late life. Imagine if the entire medical insurance system collapsed, replaced by a casino system where you could make investments in doctors, nurses and hospitals who would take care of you in the future. There would be the daily scuffle to see a short term profit, and the wise few who value-invested, looking ahead to their later years of medical incapacity.
People are simply not hard-wired to plow through their present to strategize for their future. Your ongoing blog shows a way forward that rewards the patient investor, and carefully distinguishes the short and long term investing landscapes as the two separate universes they are. Please do not apologize for it. Keep it up!
ESL
August 27, 2015
Replying to Edward Lubin
During the debate about the Affordable Care Act, I would frequently hear the argument that having health insurance should not depend on whether one has a job or not (or which company one worked for as the level of coverage provided varied among employers.) So why then should the amount of your retirement benefits be dependent upon your employer?We have insurance for everything except our financial well-being in late life." Was that not the purpose of Social Security? Notice I said purpose; I am not saying it was to provide a lavish life-style in retirement.
During the debate about the Affordable Care Act, I would frequently hear the argument that having health insurance should not depend on whether one has a job or not (or which company one worked for as the level of coverage provided varied among employers.) So why then should the amount of your retirement benefits be dependent upon your employer?
Zaphod
September 9, 2015
Replying to ESL
It shouldnt. However, the sad truth is that most people would not invest a penny if it werent for work programs that were automatic. Maybe some sort of universal account that any employer or self employed situation would make it simple/easy for you and any employer to start with job/location changes.
Ed Lubin
October 1, 2015
Replying to Zaphod
I agree. I don't pretend to know how to go about fixing the American system of retirement. The only point to my original response was irony: that there is a mountain of good information available to the interested investor on blogs like Josh's and thank goodness for that. But at the same time study after study shows that Americans don't save; their personal retirement funds are inadequate; they withdraw inopportunely from them; and their financial knowledge base is poor, all at the same time the system requires them to secure their own retirement. We are headed for a financial calamity. If Americans had to broker the individual moving parts of their own health care to that degree, we'd all be dead. I'm just saying.
Qadain
August 28, 2015
Replying to Edward Lubin
There absolutely is insurance for financial well-being in late life. It's called annuities.
The relevant difference, I think you'd say, between annuities and defined benefit pension plans is that the annuity path requires an action from an individual, while the defined benefit pension plan does not. So individuals can fail when planning for their own retirement is up to them. But defined benefits can and do fail, too, and that's what the PBGC is for. A problem of defined benefits plans is that it's a huge pool of money that, from the viewpoint of the people managing it, belongs to someone else.
Michael
August 27, 2015
Joshua,
I understand what Peter Lynch is saying and heartedly agree. I am curious if it is possible to figure out what a $10,000 investment in Standard Oil (Ohio) at $60/share would be worth today. I have attempted to get that number but can't seem to figure out the logistics after BP purchased the remaining 55% of SOHIO in 1987. I know they paid a purchase price equal to $74.20/share ($71.50/share, warrants to purchase BP stock worth $2/share and a .70 cent quarterly dividend). I'm not sure if BP issued stock to SOHIO stockholders to complete the transaction or they just cashed them out...
It looks like there was a 5 to 1 exchange possibly with 1 share of BP being issued for every 5 of Standard Oil but I'm struggling to get the clear facts. That would be equal to about 33 shares of BP if my math is right. BP has had 2 stock splits since then (2 for 1 in 1997 and 1999). So if dividends were reinvested over that time what would the BP stock be worth today and would it have been that bad of an investment?
Thanks for your time!
ChocoTaco369
September 1, 2015
Peter Lynch is 38 in that video? His hair is as white as a ghost. He looks like he is in his mid-50's. I guess it goes to show you how stressful the finance game is.
innerscorecard
September 3, 2015
Finally a great rebuttal to the "Trump should have just indexed" stupidity:
http://www.bloombergview.com/articles/2015-09-03/should-donald-trump-have-indexed-
(My Twitter account has been locked because I have to use VPNs to access it in China - stupidly, Twitter assists the Chinese government in censoring its own service!)
[email protected]
February 4, 2017
I have earned 104000 dollars in 2016 by doing an online job and I did that by working part time for 3+ hrs /day. I followed a business opportunity I was introduced by this company i found on-line and I am so happy that i made so much extra income. It's very beginner-friendly and I'm so thankful that I found out about it. This is what i do... STATICTAB.COM/msxjhtx