Capital Preservation for Value Investor

As a value investor, what will you do if your holdings dropped 20% due to downturn in economy/market (systemic issue)? Will you sell?

How will a value investor preserve his capital? Don't think the dividends collected subsequently can make up the loss of capital right?

dear palantir,

I think the key point is to have a sense of intrinsic value in your stocks. are u invested in a index fund and hence a passive investor? in that case, you don't do anything as your purchasing power is unchanged.

whereas if you are a bottom up approach to stocks, and your average holdings have dropped 20% due to macro issue then the key is to perform a "health check" on all your holdings => if the reason you bought into them (good P/E relative to growth, low price/NTA or RNAV, etc) are still intact the correct thing to do is to buy more.

personally, whenever i buy anything, i write a note on why i bought the stock, where is my target price (more applicable for true value plays rather than growth stocks), and if the reasons are not there anymore i'll sell the stock.

(30-08-2012, 12:05 PM)palantir Wrote: As a value investor, what will you do if your holdings dropped 20% due to downturn in economy/market (systemic issue)? Will you sell?

How will a value investor preserve his capital? Don't think the dividends collected subsequently can make up the loss of capital right?

Value investors are more concern on the drop of intrinsic value, rather than the market price. If market price drop (whatever %), while intrinsic value intact, value investor will not sell, rather to buy more if possible, since market price is much lesser than intrinsic value

Preservation of capital is by the fact that market price will catch-up with intrinsic value, of course, the assessment of intrinsic value must be right

In practice, emotion and confidence comes into play. You can never be 100% certain that your assessment of intrinsic value is correct (if you are, I think you should not be investing as you are deluded).

Also a stock can never be completely free of systematic issues. There is no such thing - there is only a smaller or greater exposure to systematic shock.

If we invest big enough, emotion and confidence will rock most people. Maybe limit the amount small enough to buy more later.
And buy slowly while checking further that the fundamental is sound.

(30-08-2012, 12:05 PM)palantir Wrote: As a value investor, what will you do if your holdings dropped 20% due to downturn in economy/market (systemic issue)? Will you sell?

How will a value investor preserve his capital? Don't think the dividends collected subsequently can make up the loss of capital right?

I think perhaps what others have not yet mentioned within this thread, and which I feel is most relevant to your question, is that one should always focus on the business and not the stock market. Value Investors essentially analyze businesses and are actually, in essence, business analysts. If the investor can assess the business fairly accurately and is certain that it is a high quality business which is significantly mis-priced by Mr. Market, then he would seek to purchase more as he would have his requisite margin of safety.

So to directly answer the question(s), the value investor would be concerned with the market price only with respect to his assessment of the intrinsic value of the business, after accounting for cash fow generation, growth prospects, dividend yields etc. The market is merely a mechanism for him to transact, and should not dictate his actions. Therefore, an investor who has a sound understanding of business fundamentals and valuations would not sell during market panics/downturns, but would instead seek to increase his stake.

The value investor preserves his capital not from the accumulation of dividends to offset a capital loss. This is from the perspective of a person who looks to the market price as an indicator of whether he is "right" or "wrong". The investor would judge his performance based on whether the intrinsic value of the business is increasing at the pace which he had expected, and if it surpasses inflation. If the returns he is getting from being a shareholder exceed the cost of capital of the business (and the investor's hurdle rate), rhe is doing well, regardless of what Mr. Market thinks. Frequently though, market price would catch up to the intrinsic value of the business, though it may take a lot of time and patience.

Always remember that when a business does well, the share price would naturally follow.

(30-08-2012, 09:04 PM)tanjm Wrote: In practice, emotion and confidence comes into play. You can never be 100% certain that your assessment of intrinsic value is correct (if you are, I think you should not be investing as you are deluded).

I suppose the key is to be less aggressive in assessing intrinsic value. For some businesses, even if the growth is zero, they still have enough values in it as compared with the share price.
Some will freak out when a business hits a brick wall with zero growth or even slight negative growth. But, very few businesses actually exhibit continuous growth for more than 5 years.

It is a lesson learnt from the Wallstraits intrinsic value computation. The way WS computed was simply too aggressive, unreal and not useful in determine the entry/exit of the investment.

(30-08-2012, 12:05 PM)palantir Wrote: As a value investor, what will you do if your holdings dropped 20% due to downturn in economy/market (systemic issue)? Will you sell?

How will a value investor preserve his capital? Don't think the dividends collected subsequently can make up the loss of capital right?

Part of the value investing philosophy is to have a super long time frame (for Buffett he says forever, for me it's 5-10 years). So if you are going to need money in 1 year's time, and the stock price drops 20% you're quite screwed.

If you are willing to wait, you simply increase the probability that Mr Market will price the stock correctly, or even overprice the stock, within your time horizon.

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Part of being a value investor is also about controlling one's own emotions. "Be greedy when others are fearful, be fearful when others are greedy"

Actually I bought Wing Tai at about $1.80 in 2010 (yes greedy, thinking that NAV of $2 gave 10% margin of safety, still want to enter). Over the next 2 years I just watched it plummet to $0.95 in Dec 2011. Knowing the NAV of $2+, this meant that Wing Tai was on sale, so I "doubled down" and ploughed in at $0.955 for a weighted average price of about $1.30. Still not very big margin of safety. I held on when Mr Cheung offered $1.39 (because I know the NAV is still $2+). The price now is $1.50. This is not to boast or induce people to buy or sell. This is to answer the question of what I would do when the stock price of something I own drops by xx%. If I know the valuation, it just means there is a "Christmas Sale" when I can buy things cheap.
[still vested]

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Of course there are cases where the stock price drops because of a real deterioration of the business. Then better to get out (Berlian Laju - one of my big mistakes). :-(

(31-08-2012, 09:35 AM)snowcap Wrote: ...

So if you are going to need money in 1 year's time, and the stock price drops 20% you're quite screwed.

I guess the prudent thing to do for money that you will need in 1 year's time should just be kept in the bank or go for a treasury bill that matures in 1 year. It should not be invested in the stockmarket, for you will be forced to sell for a loss if the market tanks

(31-08-2012, 10:29 AM)money Wrote:

(31-08-2012, 09:35 AM)snowcap Wrote: ...

So if you are going to need money in 1 year's time, and the stock price drops 20% you're quite screwed.

I guess the prudent thing to do for money that you will need in 1 year's time should just be kept in the bank or go for a treasury bill that matures in 1 year. It should not be invested in the stockmarket, for you will be forced to sell for a loss if the market tanks

completely agree. liquidity needs should not be invested in the stock market else you end up being a price taker.

fixed deposits, good ol' cash in bank. personally i try to keep at least 6 months of commitments in cash, with anything else above being investable.