Benjamin Graham, father of value investing, once said, "In the short-term the market is a voting machine, in the long-term, a weighing one." This little pearl of wisdom is something every investor should understand before plunging into the market. Let me illustrate.
It was about this time three years ago, in the midst of a bear market that had brought shares of powerful tech companies like EMC
At around $47 per share in 2001, Harley's price-to-earnings ratio was near 36, normally too high for my tastes. However, I was convinced my analysis was sound (I hoped), and I held for more than two years, collecting a tiny dividend, while the stock went nowhere. Graham's wisdom was my only solace as I watched Mr. Market ignore my favorite motorcycle maker. Operationally, the company was doing great. Earnings per share had more than doubled, and free cash was up 53% since my purchase.
Still, it took Mr. Market nearly three years to catch on. The stock, trading at $50 per share in late January 2004, has since risen to $62, up 23% in just five months. My investment went from a 7% total return (including dividends) to 32% while I just watched. Ironically, because of the tremendous earnings growth of the last few years, Harley's stock is cheaper, based on P/E, than when I bought it, despite the run-up.
Incidentally, dividends provide an important source of return when the stock prices are stagnant. Just ask Altria
Implicit in Graham's statement is the idea that over time, the market will value a company for its intrinsic value. If you do a thorough analysis of a company, and trust your intrinsic value estimate, you can wait for Mr. Market to come around, and maybe collect some cash dividends along the way.
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Fool contributor Chris Mallon owns shares of Harley-Davidson, Altria, and Anheuser-Busch through his private investment partnership.