Yes, but if the market tanks then you lose some of the gains you have now, correct?
The market tanking is irrelevant to whether I make money or not in the long run. You make the incorrect assumption that a gain actually reflects business value. If a stock moves from $10 to $100 the stock is worth neither $10 or $100, it is just moving. There is neither a $90 gain or a $90 loss. It is my task to determine if there is an opporunity within that price movement. If there isn't, I do nothing. If there is, I buy.
My sense is that you hold shares in a small number of stocks and it doesn't seem that dividends are your primary focus. So if you risk losing a large chunk of your capital appreciation why is that not a concern?
Because I haven't really lost anything. The business wasn't "worth" $100 nor was it "worth" $10. Dividends don't even factor into this; dividends are a side-issue.
The sooner people recognize that they're wasting their time thinking about market movements the sooner they can move on and create their fortune. The longer they take to recogonize this (and some people think about market movements until they're 6 feet under) the longer they will spend making no money.
Dividends are another story entirely. I wouldn't use dividend income, hence I don't invest for dividends. I invest to find a business that can compound money at a rate faster than what I have going now, but that's another story.
I understand buy-and-hold, but say if you bought a stock for for $5/share and it's now $10. If you thought there was a 50-50 chance that in 6 months it would be worth $4 why wouldn't you take some of that money off the table.
First, 6 months is a ridiculously short time span. A stock moving from $10 to $5 within a year shouldn't be unexpected. Conversely, you say that if I knew that it was a 50-50 chance that the $10 stock would be worth $5 why wouldn't my mentality be to establish a position at $10 and load up like crazy at $5? Why not? Because most people are short-term profit oriented, not long-term business oriented. They want their $5 p sh profit and move on to the next thing. I want to establish a position that I can look back in 30 years and say that selling out at $5 would have looked silly.
Second, I would never know there was a 50-50 chance. Nobody knows to make this kind of prediction. I would never know what the chance is.
Third, the fact that the market can price a business (with earnings, profits, accounts paypable, accounts recieveable, inventory etc.) at $10 and then at $5 within 6 months means that the market has no idea what the business is worth - and therein lies my opportunity. If somebody had a 6 or 12 month outlook they are just looking to gamble anyway.
I'm not suggesting that you look into the future, I'm saying that today looking at the state of the market the valuations of stocks appear untethered from the reality of the underlying companies. What happened to being fearful when others are greedy?
First, you are suggesting that I look into the future - how else are you determining a 50-50 chance (which is impossible to "determine") anyway?
Second, people often quote the fearful and greedy comment but they have no idea what it means (like novice RE investors quoting "location, location, location"). Individuals don't know when they should be greedy or fearful because they don't know what opportunity looks like.
An important skill of an investor is to be able to recognize opportunity. If you can't recognize the DOW going from 14000 to 7000 as an opportunity to invest in the DOW then you won't be able to recognize anything more subtle (b/c that kind of opportunity is the most blatant kind). You won't be able to recognize the opportunity of a strong company that is increasing in inventory, offset by cash-in-hand and lengthening accounts payable being priced incorrectly.
When opportunity occurs, either in the market as a whole (see NASDAQ going from 4800 to 1300 or DOW going from 14000 to 7000, etc) then you are greedy (and vice versa). When the opportunity occurs on a smaller scale (as in the case of an individual company) then you are greedy again. When the price moves in the opposite direction then you are fearful and keep your cash. Again, most people wouldn't know opportunity when they see it.
Thinking about the future or determining how I "felt" things were going to go would be a huge waste of my time (and money).
I don't know about the dot.com bust but if you spent any time reading Calculated Risk (as one of many examples) in 2007 and 2008 then the RE bust was absolutely foreseeable. I'm not savvy with economics but for me it was like watching a slow motion, scripted to the detail, train wreck. To say no non-billionaires predicted it is false.
You're speaking like everbody after every crash and recession mankind has ever had in the last 200 years. Everything is "foreseeable" after it happens.
Hey, if somebody thinks that they can "foresee" the next boom, bust, etc, they should go ahead and create a fortune from it because I know I can't.
No, that's an incorrect analogy. The point is that a small number of institutions are claimed to be gaming the market and driving up the entire index, so if you're buying stocks at today's prices then it's entirely relevant. In August something like 30% of the volume of the *entire* S&P500 was from 5 stocks (C, CIT, AIG, FNM FRE) all of which are walking zombie financials. The US Fed buys billions of treasuries in the morning and then there's a flood of equity into the markets that drives them up in the afternoon.
I don't see how, if 30% of the S&P500 volume is from 5 stocks, that impacts me. How does that information help me determine that stock ABC at $10 p sh is a bargain? I wouldn't even bother thinking about information like that, but again, that's just me.
You say on your website about 2008 "The prices of stocks declined regardless of their financial status." Isn't that reversed right now?
I would say that the bargains that existed at the end of 2008 don't exist any more.
Going back to my comments on opportunity - if a person wasn't able to recognize the DOW going from 14000 to 7000 as an opportunity there will be very little chance that they would be able to find the tiny opportnities that exist within an individual company.
I have the ability to see giant opportunities (ie market collapse) and smaller company-specific opportunities in specific company-types, but even I am blind to the millions of opportunities out there.
However, 95% of individuals don't even recognize the giant ones which is probably one of the reasons that a vast majority of the world's wealth is controlled by a tiny percentage of the world's population.
If the TSX can hold while other markets tank then it's a safer investment for someone who, like me, thinks the US market is going to tank.
You could also view it this way: the TSX has remained overvalued for longer than the other markets, therefore I should invest in the discounted markets and avoid the TSX. If there are 4 elevators on the 80th floor and 3 elevators have crashed to the 2nd floor, the safer elevator, for me, would be ones that have crashed to the 2nd floor. I personally wouldn't feel "safer" on the elevator still sitting on the 80th floor.
I don't understand how people feel that a market is "more risky" AFTER it has tanked, sell, and move into bonds. I just don't get that point of view. It makes no sense to me.
Again, most people feel safe when their risk-adjusted, asset-allocated, diversified portfolio have prices that are rising or stable. For me, it makes no sense because those are the most dangerous.
Everybody says stocks are overvalued after a crash (which I find weird; what were they thinking when the DOW was at 14000? I definately didn't hear many people holding cash as I did as per my website letter). Right now I have almost no cash on the sidelines. As I mentioend before, most people can't recognize opportunity when it strikes them in the head - so there's an even smaller chance that they would be able to recognize an opportunity in an individual security.
I understand the risk inherent in the stock market, I'm just a bit mystified why more people wouldn't try to avoid foreseeable risk.
I do not see the existance of "foreseeable risk". I just see expensive or not expensive. I don't see anything as "foreseeable".
Insider selling:buying at the end of August was 60:1, so I worry that insiders are foreseeing something. You have 1/4 of your portfolio in Fossil and the chairman of Fossil has sold almost 1M shares in the last week. That would be concerning to me, even in a buy-and-hold situation, but maybe that's just me. Perhaps I'm just foreseeing risk that isn't really there.
A CEO selling shares is meaningless to me. Again, this kind of information is similar to the 30% volume thing. I don't see why people worry about these things because it absolutely has no impact on me to make a decision.
Best regards.
PS: Thanks for the post. It gives me a lot of material for my 2009 letter!
