Act Now! Bargins disappearing quickly...or maybe not?

When the market starts to slide financial news starts to read like heated fans in a close sporting match.  Suddenly every little flinch and flick is of utter importance and vital to the final outcome.  As an investor it's really easy to get drawn into that mentality.  If we're honest with ourselves we'd admit that it's fun, there activity, there's news, there are big gains and big losses.  I think humans crave activity verses boredom.  There is also a mentality that if you don't buy quickly then you'll miss out on opportunities until the next bear market.  And given how quick bear markets seem to be these days you definitely don't want to miss out.  Or do you?

Before I go any further I want to dangle out a little maxim that is useful in investing as well as in real life: If someone is pressuring you to buy something quickly it is not a deal for you, but a deal for them.

I want to break down this argument that you must buy now to find deals with a few simple scenarios:

1) Stocks climb from here (you missed the dip) -  Let's imagine there are deals laying around everywhere, and people who want you to buy stocks would agree with that.  You need to be buying with both hands they say so you don't miss opportunities.

If you are just buying and selling the index then this line of thinking could apply.  If you mis-time the bottom you'll never have another opportunity as stocks rise to infinity (I jest, but just slightly).

But most investors aren't purchasing the index.  When a consumer loses confidence in an appliance, or a person they don't earn all of that confidence back immediately.  It takes time, the same is true with stocks.  If the market worries that a company won't make earnings and the stock drops 30% it won't rise a corresponding 43% instantly, it will be spread over time, the time it takes to rebuild confidence.  You will have this period of time to take advantage of individual opportunities.

Let's image that stocks do rise quickly with no confidence rebuilding period.  What do you do now?  Maybe it doesn't matter, if stocks do grow to the sky, and the market is always up and to the right then any time is the best time to buy.  This is the lesson of the US, that markets always recover and always go up.  If you like it at $50 buy at $60 because it'll be at $70 tomorrow.  There is never a bad time to buy, and dips just boost your gains.

As they say in financial advertising, the past is no prediction of the future, and we don't know if the US market experience will hold forever.  But investors also invest based on financial advertising and past results, even though we know they are meaningless for the future.  I selfishly hope that US stocks just go up forever as well, I live in the US and I have a family here, I don't want to spend 10/20/30/50 years treading water.

2) Stocks continue to fall -  If you loved it at $80 you'll love it even more at $60, or imagine $30, or when you sell at $15...

Investors either view a downturn as an opportunity to "buy on sale", or as a reason to panic and dump holdings they previously liked.

The longer markets fall the more confidence is lost in specific businesses.  I don't know why this is true, a stock price doesn't reflect the economic reality of the underlying company.  It's supposed to be a rough proxy, but it's susceptible to swings, over valuation and under-valuation.  But people act as if when a stock falls, even if the business is doing alright that the business has suffered harm.  What's even crazier is that company management eventually acts like this as well.  It's a self-fulfilling prophecy.

It always takes a while to rebuild confidence, and the more that confidence has been destroyed the longer it will take to rebuild.  It's during this rebuilding period that you can continue to find stocks to purchase at attractive valuations.  Sometimes a stock will drift and fall during the rebuilding phase giving even better opportunities.

The best part of investing during the rebuilding phase, verses the initial fall is that investors should have an indication as to how the business will continue going forward.

When the market fell in late 2008 and early 2009 the index had some initial quick gains.  But confidence was lost for a number of companies.  I was able to find companies trading for less than net current assets and half of book value in 2010, and in 2011, and again in 2012, then in 2013, and 2014, and even a few in 2015.  The benefit was that for most of those companies they'd published a few years of financial statements showing that trading for such a low valuation was absurd.

So what's an investor to do?  First off, don't be the consumer rushed into a sale because a salesperson says you have to buy right now.  In the markets the salesperson consists of brokers and managers whose year end bonuses are only paid if the market has a gain.  That's why it's imperative that they convince the world to buy, buy, buy.  If everything is a buy they earn a tidy commission.  If you're a broker or manager trying to earn that bonus I don't blame you at all, keep pounding the table!  For the rest of us it's worth taking a step back and making thoughtful purchases verses a snap purchase.

1 comment:

  1. Check out Asta Finance. A few middling business lines, but trading far under NCAV with no debt.