The Jobs Report and Common Stocks
On Friday the Dow Jones Industrial average lost 3.2 percent. The Standard & Poors 500 lost 3.4%, while the Nasdaq composite fell 3.6%. The reason for the drop was the monthly job report, as issued by the Labor Department, that indicated only 41,000 out of 431,000 new jobs were created by the private sector. Of course this report brought with it images of an economy in trouble - that the recovery we’ve all been hoping for has stalled and the future is bleak.
My response as an investor and my suggestion to you is “seize the day”. I want to remind you of something that has tended to get away from most of us over the last decade; investing in common stocks is not a game of chance, but one of buying or selling an ownership interest in an operating business. This intellectual process should be based on the business itself, and the current and future profit potential the business can offer us through ownership.
Warren Buffet is recognized as the preeminent intellectual investor. In the late seventies I was searching for words of wisdom to help in my own pursuit of intelligent investing when I came across his letters. Here is a quote from the 1977 letter that has as much meaning today as it had over 30 years ago.
“We select our marketable equity securities in much the same way we would evaluate a business for acquisition in its entirety. We want the business to be (1) one that we can understand, (2) with favorable long-term prospects, (3) operated by honest and competent people, and (4) available at a very attractive price. We ordinarily make no attempt to buy equities for anticipated favorable stock price behavior in the short term. In fact, if their business experience continues to satisfy us, we welcome lower market prices of stocks we own as an opportunity to acquire even more of a good thing at a better price.”
The jobs report helps us in two ways. First, the headlines generated fear in the market place, reducing market prices across the board. It also provided two bits of information that are far more important to us as owners of businesses than gross number of new jobs. The report stated that the average private sector employee worked more hours during the month than the previous months. In addition, the average private sector employee made more for each hour worked.
This tells me that businesses are selling more, while requiring more productivity from each employee. These factors will result in higher profits and ultimately more jobs. The past 33 years have been pretty good to Mr. Buffett, due to purchases of good companies at reasonable prices. Today you have the opportunity to follow that advice and “seize the day”, to become an owner of one or more quality companies at favorable prices.
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