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Current market valuations: Why patience is key.


rsodhi
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Most deep value investors would find that there aren't many actions to be made in the market right now. Especially on the buyers side of things. Still however, human nature pushes us to be active. And recently, this is a dilemma that I've been facing as I've discovered a few compelling businesses selling for cheap. I'm sure I'm not the only one. 

 

If, like me, your heart is telling you to buy but your brain is telling you to remain patient you may find value in re-visiting one of Benjamin Graham's lectures.  Here is a short excerpt and some food for thought:

 

You have to wait too long for recurrent opportunities. You get tired and restless -- especially if you are an analyst on a payroll, for it is pretty hard to justify drawing your salary just by waiting for recurrent low markets to come around. And so obviously you want to do something else besides that.

 

The thing that you would naturally be led into, if you are value-minded, would be the purchase of individual securities that are undervalued at all stages of the security market. That can be done successfully, and should be done -- with one proviso, which is that it is not wise to buy undervalued securities when the general market seems very high. That is a particularly difficult point to get across: For superficially it would seem that a high market is just the time to buy the undervalued securities, because their undervaluation seems most apparent then. If you could buy Mandel at 13, let us say, with a working capital so much larger when the general market is very high, it seems a better buy than when the general market is average or low. Peculiarly enough, experience shows that is not true. If the general market is very high and is going to have a serious decline, then your purchase of Mandel at 13 is not going to make you very happy or prosperous for the time being. In all probability the stock will also decline sharply in price in a break. Don’t forget that if Mandel or some similar company sells at less than your idea of value, it sells so because it is not popular; and it is not going to get more popular during periods when the market as a whole is declining considerably. Its popularity tends to decrease along with the popularity of stocks generally.

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I remember reading this in one of his books, but I am not sure where I stand on this.  Some of the greats like Schloss, Lynch, and Buffett would probably say that if you like mandel at 13 you should buy it and not worry about the valuation of the general market.

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I am not sure the general market is valued very high.  The number of cheap stocks is down but not non-existent.  There are a number of threads on potential undervaluations.  I don't think stocks are all that popular based upon 5 year flow of funds into mutual funds bonds are much more popular.

 

Packer

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I am not sure the general market is valued very high.  The number of cheap stocks is down but not non-existent.  There are a number of threads on potential undervaluations.  I don't think stocks are all that popular based upon 5 year flow of funds into mutual funds bonds are much more popular.

 

Packer

 

I think the consensus is that the market is fairly priced. There are still cheap stocks but it is very hard to find bargains from obvious superior U.S. businesses. From reading CoBF and various quarterly letters, investors increasingly are looking abroad for relative bargains. Europe is probably 12-18 months behind U.S. in terms of valuations. 

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I remember reading this in one of his books, but I am not sure where I stand on this.  Some of the greats like Schloss, Lynch, and Buffett would probably say that if you like mandel at 13 you should buy it and not worry about the valuation of the general market.

 

I agree.

 

Ya this just doesn't make sense to me. If I don't buy mandel at 13 and hope that it drops lower then am I not timing the market. And am I not giving too much consideration to the macro. What if I am wrong and the market is not overvalued, and it keeps climbing, then I've missed out on a perfectly good undervalued stock.

 

 

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I am not sure the general market is valued very high.  The number of cheap stocks is down but not non-existent.  There are a number of threads on potential undervaluations.  I don't think stocks are all that popular based upon 5 year flow of funds into mutual funds bonds are much more popular.

 

Packer

 

I think the consensus is that the market is fairly priced. There are still cheap stocks but it is very hard to find bargains from obvious superior U.S. businesses. From reading CoBF and various quarterly letters, investors increasingly are looking abroad for relative bargains. Europe is probably 12-18 months behind U.S. in terms of valuations.

 

Be careful basing any decision on consensus opinion.  Too many times in the past the consensus opinion was wrong.  Nassim Taleb's Fooled by Randomness is a good read that addresses this and other related issues. 

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"I remember reading this in one of his books, but I am not sure where I stand on this.  Some of the greats like Schloss, Lynch, and Buffett would probably say that if you like mandel at 13 you should buy it and not worry about the valuation of the general market."

 

(post by matjone)

--------------------------------------------------

 

"I am not sure the general market is valued very high.  The number of cheap stocks is down but not non-existent.  There are a number of threads on potential undervaluations.  I don't think stocks are all that popular based upon 5 year flow of funds into mutual funds bonds are much more popular."

 

Packer

--------------------------------------------------

 

matjone & Packer ,

 

Your responses to this original post reminds me again of how fortunate we are to have this forum to share our different views on so many interesting and important subjects.The collective knowledge and experience  on this board  continues to broaden and refine our perspectives. I for one am most grateful for the "constructive feedback &  idea generation "  here on this COBF board !

 

Although  the Ben Graham excerpt is in my view  a very good reminder for me at this specific  time; I also agree  wholeheartedly with the two of you on your key points.

 

This part of the Graham excerpt is one of the key points for  me : "....then your purchase of Mandel at 13 is not going to make you very happy or prosperous for the time being. ".....

 

For the time being,  a Mandel- like stock may not make you happy or prosperous , ....  However if the company falls out of favor more & more due to overall market downside volatility and we have confidence in our detailed research of the company ,we will of course take full advantage of our good friend "Mr Volatile Market " and add more shares of a good company that will likely make us more prosperous and happy in due time .

 

"Over  the long run the market is a weighing machine ,not a voting machine " ( or something like that ).

 

greenwave

 

 

 

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Most deep value investors would find that there aren't many actions to be made in the market right now. Especially on the buyers side of things. Still however, human nature pushes us to be active. And recently, this is a dilemma that I've been facing as I've discovered a few compelling businesses selling for cheap. I'm sure I'm not the only one. 

 

If, like me, your heart is telling you to buy but your brain is telling you to remain patient you may find value in re-visiting one of Benjamin Graham's lectures.  Here is a short excerpt and some food for thought:

 

You have to wait too long for recurrent opportunities. You get tired and restless -- especially if you are an analyst on a payroll, for it is pretty hard to justify drawing your salary just by waiting for recurrent low markets to come around. And so obviously you want to do something else besides that.

 

The thing that you would naturally be led into, if you are value-minded, would be the purchase of individual securities that are undervalued at all stages of the security market. That can be done successfully, and should be done -- with one proviso, which is that it is not wise to buy undervalued securities when the general market seems very high. That is a particularly difficult point to get across: For superficially it would seem that a high market is just the time to buy the undervalued securities, because their undervaluation seems most apparent then. If you could buy Mandel at 13, let us say, with a working capital so much larger when the general market is very high, it seems a better buy than when the general market is average or low. Peculiarly enough, experience shows that is not true. If the general market is very high and is going to have a serious decline, then your purchase of Mandel at 13 is not going to make you very happy or prosperous for the time being. In all probability the stock will also decline sharply in price in a break. Don’t forget that if Mandel or some similar company sells at less than your idea of value, it sells so because it is not popular; and it is not going to get more popular during periods when the market as a whole is declining considerably. Its popularity tends to decrease along with the popularity of stocks generally.

 

These are internal demons most of us investors face since it directly contradicts his main message of ignoring Mr. Market. Keynes, Buffett and Graham himself heavily emphasize the dictum:

It is preferable to buy dollar bills at seventy cents, rather than selling them at seventy cents in the hope of subsequently repurchasing the notes at fifty cents.

 

Vinod

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Most deep value investors would find that there aren't many actions to be made in the market right now. Especially on the buyers side of things. Still however, human nature pushes us to be active. And recently, this is a dilemma that I've been facing as I've discovered a few compelling businesses selling for cheap. I'm sure I'm not the only one. 

 

If, like me, your heart is telling you to buy but your brain is telling you to remain patient you may find value in re-visiting one of Benjamin Graham's lectures.  Here is a short excerpt and some food for thought:

 

You have to wait too long for recurrent opportunities. You get tired and restless -- especially if you are an analyst on a payroll, for it is pretty hard to justify drawing your salary just by waiting for recurrent low markets to come around. And so obviously you want to do something else besides that.

 

The thing that you would naturally be led into, if you are value-minded, would be the purchase of individual securities that are undervalued at all stages of the security market. That can be done successfully, and should be done -- with one proviso, which is that it is not wise to buy undervalued securities when the general market seems very high. That is a particularly difficult point to get across: For superficially it would seem that a high market is just the time to buy the undervalued securities, because their undervaluation seems most apparent then. If you could buy Mandel at 13, let us say, with a working capital so much larger when the general market is very high, it seems a better buy than when the general market is average or low. Peculiarly enough, experience shows that is not true. If the general market is very high and is going to have a serious decline, then your purchase of Mandel at 13 is not going to make you very happy or prosperous for the time being. In all probability the stock will also decline sharply in price in a break. Don’t forget that if Mandel or some similar company sells at less than your idea of value, it sells so because it is not popular; and it is not going to get more popular during periods when the market as a whole is declining considerably. Its popularity tends to decrease along with the popularity of stocks generally.

 

These are internal demons most of us investors face since it directly contradicts his main message of ignoring Mr. Market. Keynes, Buffett and Graham himself heavily emphasize the dictum:

It is preferable to buy dollar bills at seventy cents, rather than selling them at seventy cents in the hope of subsequently repurchasing the notes at fifty cents.

 

Vinod

 

As much as Graham believed in the Mr Market parable, there was a part of him that always feared losses, even paper losses if they lasted too long, as a result of his experience during the Great Depression.

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Looking back historically (over the past 140 years), it's a fairly normal valuation right now.  Could go down, could go up.  I am fully invested.

 

I have to disagree.  I think it is clear that some segments of this market is overvalued if not in full out bubble territory.  First, the Russell 2000 at 100x trailing P/E is overvalued, period.  I don't care how many "high fliers" are in the index.  Next, I agree with David Einhorn that we are witnessing the second internet bubble in 15 years.  Third, biotech sector is out of control. 

 

Here is a link on the trailing P/E for the Russell 2000.

 

http://online.wsj.com/mdc/public/page/2_3021-peyield.html

 

On the flip side, I believe many large cap stocks are at market or below market multiples. 

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The market seems slightly overvalued to me, but I would definitely buy without fear whenever I find a compelling opportunity. Buffett said that he they never would dream of having an asset allocation meeting like going to 65/35 stocks/bonds and that they don't even think that way at all. The cash depends on the opportunity set in front of them. If their cash is piling up, it is because they haven't found any compelling opportunities. If they find one, they just stick their money into it.

 

In my opinion all this thinking about the general market was one of Graham's weak suits. He probably would have been better off if he hadn't thought about this at all. Keep in mind that Graham was one of the two (along with Buffett's father) that advised Buffett to wait starting his partnership until the Dow drops below 200 again (which it never did).

 

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Tom1234 that is one side of the argument and I think it makes sense, but I can see some sense in Graham's allocation rules too.  It comes down to a personal decision. I think if I had a billion dollars or even 20 million I probably wouldn't worry about having cash either. 

 

Graham's rules kept him safe while allowing him to still make good returns.  He might have made more money if he was less cautious and I think investors will probably end up richer in the end always being fully invested, but that doesn't mean the allocation rules were a bad idea.

 

One thing I like to think about is how things would have changed for people had they been born at different times.  What if you push Buffett's birth date back to say 1901?  He starts his partnership and is a couple years into it around 1929.  Would he have made the same decision to wind it up, like he did in '69?  I think that is an easier decision when you are old and wise and rich, but it's hard to have patience when you are young and hungry.  Maybe he would have gotten hit by it and would have come away with a more cautious attitude.

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WEB

 

Warren Buffett rejected the suggestion the U.S. stock market is "too frothy" right now as the major indexes re-approach their all-time highs.

 

"I think we're in a range, and it's a big zone always, of reasonableness. But stocks ought to be higher every 10 years.There's a plow back of earnings that goes back year after year. Stocks will become worth more decade after decade, not in any precise manner, not in an even manner or anything of the sort. But 10 years, 20 years, 30 years, stocks will be worth more than they are today."

 

Asked if he agreed with investor David Einhorn's warning that "we are witnessing our second tech bubble in 15 years," Buffett said he doesn't always understand tech valuations, but it's not like the period before 2001 when "you could almost sell anything and capitalize eyeballs and all of that. I don't think it's reached that point and certainly I don't think the general market level is going to bubble up."

 

 

http://www.cnbc.com/id/101607268

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One thing I like to think about is how things would have changed for people had they been born at different times.  What if you push Buffett's birth date back to say 1901?  He starts his partnership and is a couple years into it around 1929.  Would he have made the same decision to wind it up, like he did in '69?  I think that is an easier decision when you are old and wise and rich, but it's hard to have patience when you are young and hungry.  Maybe he would have gotten hit by it and would have come away with a more cautious attitude.

 

Malcolm Gladwell discusses this topic in one of his books.  Maybe it was in Outliers.  It's in the context of the luck component of success in life.  How when you are born (and where you are born) is a large factor in what one is able to accomplish.  He talks a lot about people like Steve Jobs and Bill Gates and how it isn't a coincidence that they were both born in the mid 1950s.  That they both came of age at a time when computer availability was in its infancy and in a place where they both had access.  So if they were born maybe even a year or 2 earlier, they come of age prior to that time and if a year or 2 later someone else beat them to it. 

 

The other thing I remember about his discussion is how he looked back at how very few of the "most" successful people were born I think in the 1910s or 1920s because they would have come of age during the Depression and there wasn't the opportunities around, but someone born in the 1930s came of age after the Depression and WWII during a period of expansion.

 

He talks about Canadian hockey players and how most great ones are born early in the year because of how leagues are organized and how, for example, 8 year old boys are grouped together, but there is a big difference between one born in January and one born in December (almost a year older).  Anyway, Gladwell is just pop science, but it's always interesting and applicable to the topic you raised.

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One thing I like to think about is how things would have changed for people had they been born at different times.  What if you push Buffett's birth date back to say 1901?  He starts his partnership and is a couple years into it around 1929.  Would he have made the same decision to wind it up, like he did in '69?  I think that is an easier decision when you are old and wise and rich, but it's hard to have patience when you are young and hungry.  Maybe he would have gotten hit by it and would have come away with a more cautious attitude.

 

Malcolm Gladwell discusses this topic in one of his books.  Maybe it was in Outliers.  It's in the context of the luck component of success in life.  How when you are born (and where you are born) is a large factor in what one is able to accomplish.  He talks a lot about people like Steve Jobs and Bill Gates and how it isn't a coincidence that they were both born in the mid 1950s.  That they both came of age at a time when computer availability was in its infancy and in a place where they both had access.  So if they were born maybe even a year or 2 earlier, they come of age prior to that time and if a year or 2 later someone else beat them to it. 

 

The other thing I remember about his discussion is how he looked back at how very few of the "most" successful people were born I think in the 1910s or 1920s because they would have come of age during the Depression and there wasn't the opportunities around, but someone born in the 1930s came of age after the Depression and WWII during a period of expansion.

 

He talks about Canadian hockey players and how most great ones are born early in the year because of how leagues are organized and how, for example, 8 year old boys are grouped together, but there is a big difference between one born in January and one born in December (almost a year older).  Anyway, Gladwell is just pop science, but it's always interesting and applicable to the topic you raised.

 

Jim Collins posits an interesting counterpoint - specifically to the hockey example.  In his book "great by choice" he says that although an overwhelming majority of hockey players are born in the earlier part of the year there is about a half and half split of hall of fame inductees (half born in the early part of the year and half born in the latter).  He goes on to mention that this infers that a player born in the latter half of the year who IS in the league has a greater chance of ascending the ranks into the hall of fame.

 

His point being that time, place and luck can enhance someone's own ability and produce "good" performance but that truly exceptional performance may owe it's origin to consistency and discipline... (coupled with innate talent).

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Most deep value investors would find that there aren't many actions to be made in the market right now. Especially on the buyers side of things. Still however, human nature pushes us to be active. And recently, this is a dilemma that I've been facing as I've discovered a few compelling businesses selling for cheap. I'm sure I'm not the only one. 

 

If, like me, your heart is telling you to buy but your brain is telling you to remain patient you may find value in re-visiting one of Benjamin Graham's lectures.  Here is a short excerpt and some food for thought:

 

You have to wait too long for recurrent opportunities. You get tired and restless -- especially if you are an analyst on a payroll, for it is pretty hard to justify drawing your salary just by waiting for recurrent low markets to come around. And so obviously you want to do something else besides that.

 

The thing that you would naturally be led into, if you are value-minded, would be the purchase of individual securities that are undervalued at all stages of the security market. That can be done successfully, and should be done -- with one proviso, which is that it is not wise to buy undervalued securities when the general market seems very high. That is a particularly difficult point to get across: For superficially it would seem that a high market is just the time to buy the undervalued securities, because their undervaluation seems most apparent then. If you could buy Mandel at 13, let us say, with a working capital so much larger when the general market is very high, it seems a better buy than when the general market is average or low. Peculiarly enough, experience shows that is not true. If the general market is very high and is going to have a serious decline, then your purchase of Mandel at 13 is not going to make you very happy or prosperous for the time being. In all probability the stock will also decline sharply in price in a break. Don’t forget that if Mandel or some similar company sells at less than your idea of value, it sells so because it is not popular; and it is not going to get more popular during periods when the market as a whole is declining considerably. Its popularity tends to decrease along with the popularity of stocks generally.

 

These are internal demons most of us investors face since it directly contradicts his main message of ignoring Mr. Market. Keynes, Buffett and Graham himself heavily emphasize the dictum:

It is preferable to buy dollar bills at seventy cents, rather than selling them at seventy cents in the hope of subsequently repurchasing the notes at fifty cents.

 

Vinod

 

Looks like Hussman did not follow that advice, instead he would only buy the dollar at $0.50, and look what happened to him.....

 

The following is a quote from his website in 2013, one of the more illogical money management decisions I have heard over the years.......

 

....... During the Depression, the market declined by two-thirds even after it became undervalued on every measure. It was that possibility that prompted me to hit the stop button to ensure that our methods were fully robust to those risks; that we could partition favorable and unfavorable outcomes even under the most hostile conditions; and that the resulting return/risk measures could be validated in “holdout data.” In the process, I damaged my reputation for a while, missing a huge advance in the interim. That’s unfortunate, but it’s also fine – markets move in cycles, and this one will also.

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