I recently bought some stock. Yes, I know that market valuations are not cheap and that there are relatively more risks involved to invest now. My long term goal is, ultimately to increase my war-chest.
- Iconic hedge fund manager Seth Klarman says investors are missing huge risks (read here)
However, I do believe that in some situations, these warrant a second look. And perhaps a buy move. One such situation is when the company management made a blunder which indirectly affects the future revenue prospect of the company as a whole.
Yes, the price trend could be down in the short term and you could be catching a falling knife when the trend is down. However, personally to me, as long as the price offers a margin of safety to my intrinsic price calculation and trailing PEG estimates, it doesn’t really matter. And really, I do sucks at timing the stock price.
However, often the stocks I bought, are stocks which I have wanted to buy prior to the price drop. These were always on my ‘shopping list’ so to speak. And when the opportunities come knocking (be it in a good market or bad market), I would often consider them. If the long-term fundamentals are intact, I do not see why I shouldn’t be buying. Sure, prices might be cheaper when markets crash, but then I probably would buy more if all other factors remain the same. I can never be sure if the price would bounce back up, stay up (even during a general market crash), or fall lower…
It is like I am eyeing this T-shirt for the longest time. When it is on sale, I buy it. Sure, I could wait for the Great Singapore Sale.. but what if that T-shirt wasn’t on sale during the GSS? There are infinite ‘what if’.
“Buying early on the way down looks a great deal like being wrong, but it isn’t. It turns out you won’t be able to accurately tell who’s been swimming naked until after the tide comes back in.” Seth Klarman
Then there are other situations, whereby the valuations of the company did not factor in the future growth prospect.
Yes, again there are risks. There are people who studied every bit of information they have about a stock/company so as to eliminate all ‘risks’ before they place an order. Yes, nothing wrong with that, but we all know that investing is part science part art.
“I think that the analysis [valuation] is actually the easy part. When I speak to business school students, I tell them investing is the intersection between economics and psychology. Economics, the valuation of a business, is not that hard. The psychology – how much do you buy? Do you buy it at this price? Do you wait for a lower price? What do you do when it looks like the world might end? Those things are harder and knowing whether you stand there and buy more or something legitimately has gone wrong and you need to sell, those are harder things and that you learn with experience and you learn by having the right psychological make-up in the first place.” Seth Klarman
“First level thinking says, ‘It’s a good company; let’s buy the stock.’ Second level thinking says, ‘It’s a good company, but everyone thinks it’s a great company, and it’s not. So the stock’s overrated and overpriced; let’s sell.’
First-level thinking says, ‘The outlook calls for low growth and rising inflation. Let’s dump our stocks.’ Second-level thinking says, ‘The outlook stinks, but everyone else is selling in a panic. Buy!’
First-level thinking says, ‘I think the company’s earnings will fall; sell.’ Second-level thinking says, ‘I think the company’s earnings will fall less than people expect, and the pleasant surprise will lift the stock; buy.’ “
However, having said that, I can frankly tell you, that I will never be “SURE” that this stock purchase is a sure bet. I think in today’s world, information is easily obtained.
We get flooded with news every single day, hour, minutes… The analytical advantage for a retail investor like me (as compared to many professional investors) is simply not there. As Howard Marks would usually tell his son when his son proposed to buy some stock base on some news he read, “Who doesn’t know that?”. The fact is, a deeper understanding of the news is needed, and perhaps the risk is the main ingredient for a good stock buy. As investors, we have to see things and interpret risks differently.
Investors, in general, do not like uncertainty, the murky gray which they can’t forecast. In situations like these, stock prices often stay low or fall. What people perceive as untouchable stocks, great investing legends buy into them. If all known factors (and even unknown factors) are already priced in, what margin of safety will there be?
When I look at the buy and sell moves of some of the iconic value investors in the US (this is relatively easy – as their 13F filing is known publicly). I still find that these investors continue to make some buy moves despite the general market being at ‘not cheap’ valuations (well, on the other hand, Charlie Munger did not make much ‘moves” I noticed). And when I look at their specific buy purchases, I can see the reasons behind why they buy each of these stocks. Each is a special situation on its own.
They are still invested substantially in this market. And as mentioned by Monish Prabai in one of his talks, if current interest rates stay low for a substantial period, current valuations are actually cheap.
There will always be pockets of opportunities (despite the ups and downs of the markets).
- Seth Klarman’s latest trade will surprise you (read here) and Value investing giant who takes after Buffett just bought big stakes in two Apple suppliers (read here)
Personally, I have great respect for Seth Klarman.
He is a very private person, but under that private demeanor, is a man with many great ideas.
His moves are often not that easy to understand (and hence, to many, his moves are not easy to replicate or put it in another way, one would need strong conviction). The companies he invests in, are often very specialized (eg. pharmaceutical, LNG, tech stocks, etc). One needs to have a very deep understanding within a very narrow band to fully understand the business moat. To copy his moves, one needs to have a very strong faith.
He doesn’t normally have a very good timing I noticed, but he is extremely patient and often make very bold moves (extremely high amount for a few companies). He is willing to take on companies with little earnings and often at the critical point of a turn around (eg. Cheniere Energy, Keryx Biopharmaceuticals, and Qorvo). These are extremely long term plays, and are often companies, many fund managers fail to invest in.
- Mohnish Pabrai Buys AerCap Holdings NV, Sells Seritage Growth Properties (read here) and AerCap Holdings Is A Value Investor’s Dream Stock (read here)
Monish Pabrai is unabashedly frank about his tendency to copy other great investors’ moves. He proclaims that he has little originality and ideas of his own. However, don’t let that fool you, his track record is remarkable.
He aims to hold on to great compounders over the long term, and I can clearly understand why he buys certain stocks. He likes bargains (eg. buying $1 for 50 cents). However, he does know his own weakness in not paying fair value for great companies (but he has the humility to mimic the moves of other great investors).
- Here’s Why Buffett Bought Store Capital (read here)
Warren Buffett is one person who needs no introduction. As compared to Seth Klarman, the companies (and the reasons behind), at least to me, in comparison, is more forthcoming (straight forward). It is not difficult to understand the business models of many of the companies he has chosen.
However, he does sometimes focus on dividend stocks, which I felt (as someone investing from outside the US), is not really to my advantage (tax 30%). I tend to look for growth stocks in building up my US stock portfolio.
Without a doubt, he is extremely good at finding companies with deep and strong moats (that seems to withstand the onslaught of disruptive trends).