“Buy and hold, Mr. Market will correct itself!”. If anyone out there tries to have a conversation with a value investing friends and it seems to turn into a religious or cult like debate. Send them over to watch this video.
Why did value investing fail so much this year? Why does it hurt so bad? Well, it only takes one horrific year to wipe out 5 years of “Mr. Market correcting to intrinsic value”. Why so much pain this time around? Well, how long ago did the baby boomers start retiring? Hmm…how about 5-7 years ago. Throw in the fact that the baby boomers are the most active retirement generation ever, they probably let their investments ride in “safe” managers like Warren Buffett, Mohnish Pabrai, Bill Miller, and Ezra Melkin.
I mean, if you buy something at a discount to intrinsic value, how much farther can it go down? The whole reason you are buying the stock is that it is already beaten down, so haven’t we limited our downside?
Problem #1. Mr. Market can take a very long time to correct
Problem #2 Time cost money, in order to stay with your value investments you need cash
Problem #3 What if Mr. Market doesn’t correct to historic valuation, but instead is efficient in telling you the company you just bought a discount, is at a DISCOUNT for a reason.
Problem #4 Value investors usually have a strict rule on when to sell, like a company reaching intrinsic value or once they get a 10% return on investment. They never usually “let it ride”. So when they have a year where they lose 45%, they don’t have the upside to get it back very quickly. Unlike sector funds like biomedical or technology funds, you may have a -34% on year, but the next could be up 40%.
I thought the song “When I’m Right….I’m Right” by Slotmachine was perfect for this video.
The song is used with full permission and was very enjoyable to the band!
Update on January 27th…
Just to let everyone know I am not the only bat in the bellfry..
I got a call today asking what I thought about using the last few trading days of the year for buying stocks. Although no one can time the market, remember it is all about “time in the market, not timing the market.”.
On one hand we have the Obama presidency coming up and thinks are so bleak that IS it the the time to buy? On the other, things ARE so bleak, why jump in now, as opposed to a few weeks or months from now?
Here is what I think. A few notes, one, the US consumer is still contracting, so that is bad. (I.E. see the retail sales figures from Christmas and the “now poplular - Who is going to close their doors” game). Credit is still frozen, starting to show a few drips here and there of thawing, but still very frozen. Unemployment is still going up, and I think the estimates at a 9% peak are too low. Home prices are still falling (Can they still do that? Aren’t we at zero yet?). Retail space and commercial real estate is very much starting to show signs of trouble, starting with the malls and working its way up to office space, but…
The one reason I would not invest this week is hedge fund redemption. All the billions of dollars in hedge funds that investors have decided to pull out get priced at the closing price of the fund on December 31. Although many hedge funds have liquidated positions, no one knows how many more need to free up money in the next few days to pay out to investors. Is it only a few that need to sell? Are there some that liquidate on the last possible day based on algorithms and computer trading? Maybe. I have no idea, and neither does anyone else really.
I think there is much more downside risk to jumping in now than waiting a few weeks. Are you going to miss a 1000 point move up based on the above reasons? No, probably not. Could you get in the way of a 1000 point move down based on world wide hedge fund redemption computers selling and allocating cash? Maybe. Why risk it over the next few days. Relax, enjoy the new year, and get back at it on Monday.
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