The Sifter Fund has risen 110% over the past five years (29.1.2019-29.1.2024), equating to an average annual return of 16%. So, why warn about a potential decline in stock prices? Well, because it’s inevitable that one day, whether it be tomorrow, next week, or next year, stocks will again experience a sharp decline.
Such crashes test the true nature and strategy of an investor. Are you playing the stock price game or are you a long-term owner of quality companies?
The Stock Price Game
The fundamental idea of investing is, of course, to gain returns on investments over short or long periods.
The stock price game refers to activities where stocks are seen as race horses, hopefully rising in value before profits are realized.
This leads to a continuous cycle of searching for new gaming chips to replace the old ones. Additionally, selling incurs extra costs in the form of taxes.
Gambling also occurs when an investor constantly tries to time the buying and selling of stocks correctly. Finding the right moment is challenging, and psychologically, re-entering the market is difficult.
Few admit to investing this way, but many recognize such temptations within themselves.
If, however, these gambling moves happen to succeed perfectly once, it generates dopamine in our nervous system and creates a confirmation bias in the investor. This leads to delusional thinking: I can beat the market with my intelligence.
This is one of the biggest risks in investing. Emotions take over.
The Quality Company Owner Thinks Differently
A long-term quality investor also seeks returns, but with a different mindset than the stock price player.
Quality investors understand that, over a sufficient period, excellent businesses provide outstanding returns.
They are interested in a company’s business, not its digital stock price. They research and analyze businesses where they could imagine being the principal owner for a long time.
For the owner, it’s essential that the company’s competitive advantages remain intact, earnings are predictable, and major business risks are avoided.
Quality investors know that stock price fluctuations do not make a company worse or better.
Stock Market Crashes are Part of Investing
In the last hundred years, we have experienced four distinct crashes. Unfortunately, market crashes are part of the nature of the stock market, born out of human greed and euphoria overshadowing rational thought.
The fact is, no one can predict when a market crash will start or end.
Historically, market crashes have caught investors by surprise on quiet monday mornings, when no one has foreseen them.
Sadly, uncertainty is the price a stock investor must calmly accept to earn returns in both rising and falling markets.
An Investor’s Nature is Revealed in Crashes
When stock prices next fall or even crash, it is a completely normal phase of the stock market. Good companies will drop in price, and bad ones often more so. In such situations, an investor’s emotions are tested.
A long-term owner does not panic when stock prices fall. They are prepared for downturns and have built a portfolio that allows them to sleep well at night, even if their companies’ stock prices are in the red.
The value of quality business often hasn’t deteriorated, even if the market pays less for it tomorrow than today.
How Does Sifter Act When Stock Prices Fall?
In managing the Sifter Fund, we make a five-year earnings return estimate for companies. Our long-term investment strategy guides us to look beyond market downturns.
The most important and challenging aspect is to determine whether a company’s business has suffered a permanent setback or if the decline in stock prices is just a market overreaction.
If a company’s competitive advantages and market position remain unchanged, there is no reason for us to sell quality businesses due to a drop in stock prices.
Downturns also offer opportunities but even these require careful preparation. For example, in 2022, we bought shares of semiconductor equipment manufacturers Applied Materials and BE Semiconductor at a discount during a downturn in high-quality technology and semiconductor companies.
How is Sifter Prepared for a Decline in Stock Prices?
The Sifter Fund’s investment strategy is to own very high-quality, growing, and healthy companies worldwide and hold onto them through both market rises and falls. We have been doing this for over 20 years.
The fund has faced the 2008 financial crisis, the 2020 Covid crash, and a series of smaller market corrections.
Globally diversified quality companies have given us peace of mind in uncertain times. We have decided to remain owners of our carefully researched companies even when the stock market prices them down.
Despite historical crashes, the Sifter Fund’s quality companies have provided investors with an average annual return of 9,9% after all expenses (19.6.2003–29.1.2024).
Sifter Fund’s Investment Principles
- 30 high-quality and healthy companies
- Focus on the companies’ growing money-making-capacity
- Over 5 years investment horizon
- Global diversification
- No market timing
- No staring at stock prices
- No opportunism
Read more about our Quality Investing strategy.
Santeri Korpinen
CEO
