Investing versus Speculating
With the amount of volatility seen in the equity markets today, many people seem to believe that the old proven practices of investing in solid businesses for the long run no longer apply. But it's important to remember that there is a significant distinction between true investing and speculating. And it's even more important to recognize that the level of risk taken by speculators is significantly greater than the amount of risk assumed by investors.
Although there are famous speculators, the average investor would not have the appetite for risk or the steely nerves that speculation requires. On the other hand, most of the great icons of sound and prudent investing practices offer insights and strategies that are as much common sense and prudent behavior, as they are genius. Therefore, the everyday investor is capable of applying their insights and lessons, and therefore achieving their own low risk investment success.
Famous investors like Warren Buffett, Philip Fisher, Peter Lynch, Bill Miller, John Neff, Sir John Templeton, Thomas Rowe Price and Bill Ruane are just a sampling of many great prudent investors who believe in investing in good businesses rather than speculating in the stock market. Then of course there is Ben Graham, who taught many of the above-mentioned investing greats and offered us one of my favorite quotes to share: "in the short run the market is a voting machine, but in the long run it's a weighing machine."
Speculators focus on stock price movement and attempt to guess the magnitude and direction where the price of the market or a company may go next. Speculators tend to be very active traders, and therefore, tend to ignore, or at least pay very little attention to the fundamentals of the business. Consequently, the trader/speculator, deals with the voting machine or short-run market that Mr. Graham spoke about. To me at least, this turns the stock market into a casino, and trading is closer to gambling than it is to prudent behavior.
In contrast, sound investors are interested in owning the business and therefore take a longer-term approach. Since they do not intend to sell the business they invest in for a long period of time, short-term market volatility concerns them very little. Consequently, investors are interested in the "weight" of the business, and therefore carefully scrutinize the fundamentals underpinning the companies they are interested in. To prudent investors, the stock market merely represents the store where they can find good businesses to buy and hold for the long run. Once they buy their business, the store they bought it in is no longer of any interest to them.
Esterline Technologies - Solid Fundamentals on Sale
As I was recently shopping in the stock market store, I came across a very interesting business in the aerospace/defense industry that I believe is currently on sale. This is a growth business with solid fundamentals and a compelling thesis for continued above-average growth. However, since it operates in the defense industry, many investors, mistakenly in my opinion, seem to believe that cuts in defense spending would curtail or eliminate this company's growth potential. Consequently, I believe this quality company is being mispriced by Mr. Market, and is currently significantly undervalued.
The following slides from their Investor and Analyst Day Conference presentation on September 15, 2011 summarizes their businesses and geographic exposure. In addition to offering a balanced business mix by end market, Esterline Technologies (ESL) is not just dependent on the U.S.