Value Investor?

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#1
One of the Worst Arguments in Finance
Posted on December 21, 2014
“In the stock market, value standards don’t determine prices; prices determine value standards.” – Benjamin Graham

I was having a conversation on Twitter last Friday afternoon with my favorite
pseudonymous blogger about the relative underperformance of emerging market stocks to U.S. stocks. He ticked off a laundry list of reasons that there’s a good possibility for this relative outperformance in the U.S. to continue. I couldn’t argue with any of his conclusions. They all made sense.
I was just about to reply with the standard, “Don’t you think those reasons are all priced in at this point?” before catching myself and realizing that this is one of the worst arguments to make when talking about the markets. I always shake my head when I hear this argument because no one ever really knows what’s priced in to a security, market or asset class.
To be able to say with a great degree of confidence that you know what’s priced in requires two parts to the “priced in” equation: (1) The intrinsic value of the investment in question and (2) The short-term psychology of the other market participants. You can make a reasonable educated guess on these two factors, but no one can forecast either with anything remotely approaching the precision needed to understand what’s priced in and what’s yet to come.
James Osborne covered the degree of difficulty involved in the intrinsic value approach in a post last week:
If you want to come to me and say “The intrinsic value of this stock is $45 because that is what investors have historically been willing to pay for these earnings so it is a buy at $30,” my simple question is: why isn’t the market willing to pay for those earnings today? Ultimately, intrinsic value is decided by the market. It is an odd bit of dissonance to state that today the market is wrong about a stock’s “intrinsic value” but to expect the market to get things “right” sometime in the future.
The best you can hope for as an investor is Graham and Buffett’s margin of safety and even that requires a very patient and disciplined approach. Buffett wrote his famous New York Times op-ed a month after Lehman Brothers went under in the fall of 2008 when he said: “Buy American. I am.” The S&P 500 was down roughly 40% from the peak seen a year earlier, but here’s what Buffett had to say at the time:
Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.
And he was right on both accounts. The market dropped another 30% from the date he wrote than piece until finally bottoming out five months later. I’m not saying emerging markets are a screaming buy at these levels like Buffett was saying about U.S. stocks in the fall of 2008. That’s a stretch since values go from being absolute to relative during a long bull market.
Energy stocks are another relative underperformer, having gotten slammed this year as the price of oil has crashed. You could make many very good arguments to not go near these stocks right now, just as you can with emerging markets. The thing is that there are always going to be good reasons not buy something when it’s underperforming or suffered a large drawdown. Investments don’t get cheap or fall for no reason.
This is why value investing can be so difficult. You’re going against the current into the carnage. No one ever really feels comfortable buying underperforming assets because they’re always littered with problems.
But Buffett wasn’t saying, “here’s the bottom, buy today or else.” He was saying that things were starting to look attractive. And since he felt there was a margin of safety, it was time to start buying over time. The best purchase Munger and Buffett made during the crisis was actually five months later on the exact day that the market bottomed when they bought shares of Wells Fargo. Buffett’s favorite bank was around $8 a share on that day while it’s now over $50.
Once they found they’re margin of safety they kept on buying. In a sense they dollar cost averaged into the market while stocks kept going down.
I think that’s the true sign of a value investor – someone that’s willing to continue buying and rebalancing into an investment or asset class that they deem to be worthy enough to gain inclusion in their portfolio, even if it continues to fall after they make the initial purchase. The true bargain basement prices are only going to be known with the benefit of hindsight. Cheap investments can always get cheaper.
Again, I’m not sure that emerging markets or energy stocks are going to make good investments from these levels. It all depends on your time horizon and threshold for pain in the meantime. I don’t know what’s “priced in” or how investors are planning to allocate their capital to those areas in the future. But I think if you’ve decided to make the leap into either of these investments, or any other relative values for that matter, and consider yourself a value investor, the best risk control is to make periodic purchases over time. The other is having a diversified portfolio of assets because you just don’t know when things are going to turn around for the laggards.
Diversifying over time at lower prices is a value investor’s dream scenario, assuming they have the available capital. It’s also one of the hardest things to do because no on ever really knows what’s priced in.

NB:-
Do VBs do some or all the above strategies / actions as VIs.
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
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#2
pyramid up on winners! not catch falling knives! Tongue
1) Try NOT to LOSE money!
2) Do NOT SELL in BEAR, BUY-BUY-BUY! invest in managements/companies that does the same!
3) CASH in hand is KING in BEAR! 
4) In BULL, SELL-SELL-SELL! 
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#3
I had read many financial books that disapprove of pyramid down because cheap investments can always get cheaper. Actually catching a falling knife is still O. K. if you have the capital, high pain threshold and time factor. The most worrying part is in case your due diligence has missed some unknown unknowns. Then there is no falling knife to catch as it has sunked into the bottomless pits.

Almost all financial authors recommend pyramid up. It's obvious there are many advantages if you pyramid up correctly. Therefore i am quite surprised many GURUS (some are Billionaires) recommended pyramid down. One of the reason given is if you buy when the price is in the uptrend, you have missed the best opportunities already. Perhaps their due diligence is so much more better than us, they dare to buy all the way down.

By logic, pyramid up is the safer route to take. Then please explain why the GURUS don't really practise it.
Me?
Have not tried pyramid up. But still manage to survive. (Must learn to pyramid up or at least don't buy too early).
Thank God.
Amen.
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
Reply
#4
Unknown Unknowns are the scariest part of it all.
In a lot of cases, there is no way of preempting it and as some cases have proven that even the safest of safe can fail. (And never recover).

It's a case of the more I learn, the less I realize I know. Only way of eliminating this risk is to diversify sufficiently and not to place a large portion of you wealth into something you have no control over.
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#5
What i did and hope to continue is to diversify into similar theme (other counter). For example keppel comes down significantly. I can buy some. If keppel goes lower, i can buy more keppel or grab SBI instead. SBI impacted due to oil too but if i believe in the oil industry recovery, SBI is good alternative to spread the risk. And indeed if recover, most likely both counters will move up. However assume keepel screws up due to internal issue, i do not have all in a basket.

Just my Diary
corylogics.blogspot.com/


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#6
As long as OIL is the source of all what is happenings in our world, KEPPELCORP & SCI will survive.
If you can imagine, one day OIL is replaceable by some other substance then what happens? i don't know.
But i have thought of that. Perhaps it will never be in another 50 to 100 years.
Impossible you say. Now how many things have happened in your lifetime that many ordinary folks like us never think of it. You go and think about it then tell me.
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
Reply
#7
Comment is more on spreading of risk methodology due to a company internal issue not a discussion on oil importance !
Please read again.

As in what can happen in our lifetime. Actually if we classify as widely in use or known basis !

1. Man lands on Moon. Robots land on Mars ! If you are in 1940s and said that, people will debate.
2. Refrigeration and Aircon widely use in asia
3. Nuclear Bomb is something unimaginable till it dropped
4. Nuclear Power is clean. Hey it power top class submarine and carrier. Not possible for space travel ?
5. Computer at our "lap" and Colour TV ! that we take for granted. Internet revolutionize our social and productivity. We buy things, watch video ... this are unimaginable just 30 years ago. Skype, Facebook, Tweet, computer games, line, whatsapp ... so many that changed our lifestyles.

6. Curing of tuberculosis that kills millions.
7. Deadly influenza pandemic kill more people in WW1 than the bullets itself. Today we have SAR that kill hundreds with modern medical care and we shout end of days coming.
http://en.wikipedia.org/wiki/1918_flu_pandemic . Interesting is the weak who survived ! so who says healthy is good ?

Do not underestimate human ingenuity be it good or bad. Neither try to predict impossibility.

Cory

Just my Diary
corylogics.blogspot.com/


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#8
Let your imaginations run like wild horses,
Or a small stream to a river to a lake to the ocean.
"imagination is more powerful than knowledge"
i think Jack Ma is one example.

I have worked in shell before and it is really amazing I learn that so many things we use today originated from OIL.

Basically I am saying never, never rule out anything in an investment. Upside, downside or to protect one's backside. And not any thing to do with prediction.
WB:-

1) Rule # 1, do not lose money.
2) Rule # 2, refer to # 1.
3) Not until you can manage your emotions, you can manage your money.

Truism of Investments.
A) Buying a security is buying RISK not Return
B) You can control RISK (to a certain level, hopefully only.) But definitely not the outcome of the Return.

NB:-
My signature is meant for psychoing myself. No offence to anyone. i am trying not to lose money unnecessary anymore.
Reply
#9
(09-01-2015, 11:56 PM)Big Toe Wrote: Unknown Unknowns are the scariest part of it all.
In a lot of cases, there is no way of preempting it and as some cases have proven that even the safest of safe can fail. (And never recover).

It's a case of the more I learn, the less I realize I know. Only way of eliminating this risk is to diversify sufficiently and not to place a large portion of you wealth into something you have no control over.

I concur on the need of diversification, as a hedge to "Unknown Unknowns" and also mistakes.

The quest now is, what is the "sufficiently"?

Is diversify to 10 stocks of different sectors sufficient? Or we need to diversify into 100 to suffice? etc. etc.
“夏则资皮,冬则资纱,旱则资船,水则资车” - 范蠡
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#10
33 stocks with 3.33% each, Big Grin
that's the prefect diversification.
1) Try NOT to LOSE money!
2) Do NOT SELL in BEAR, BUY-BUY-BUY! invest in managements/companies that does the same!
3) CASH in hand is KING in BEAR! 
4) In BULL, SELL-SELL-SELL! 
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