Remind us what it's like in a deep bear market when

[LongHaul]

Remind us what it's like in a deep bear market when people are selling just because their pain threshholds are being met while ignoring fundamentals.  It has been a while since there was a real scare and many of us (including me) have forgotten.  I am really talking about the market or even a stock being down 20-30%.  What drives people to sell when stocks are cheap?

 

Stories appreciated.

[Palantir]

Check out the SUNE thread.

[Jurgis]

It has been a while since there was a real scare

 

Did you ever look at oil co prices recently? ;)

 

You sell because:

1. What you thought was cheap is not really at current oil price/economic conditions/etc. This applies not only to commodity businesses, but I won't give other examples not to stir hornets' nests. Check out some of the long threads. ;)

2. What went down 80% can go down another 80% and holding will just make you feel stupid. In worst case it can go down another 100% to zero. So selling at 80% down is not necessarily a mistake.

3. You sell because you just give up. No longer believe in value, in your analysis, etc. Might be mistake, might be not.

 

But, yeah, we've been having a very nice scare recently. Not in US indexes though.

 

Disclosure: I hold some oil company stocks and bonds. Some of them went to almost zero and are/will be BK. I have sold stocks/bonds in the past at 80-90% losses. I have held stocks that went down 80-90% and then went up 10x. I have held stocks that went down 80-90% and then went down another 100%. I've seen things you people wouldn't believe ... ... sorry wrong movie.  8)

[merkhet]

Some people don't know what they own. I've seen that a few times.

[LongHaul]

It is not a mistake to sell because one has made an error in analysis and realizes something is overvalued or has a ton of risk.  If you haven't lost money in stocks you haven't played the game.

 

What is interesting to me is people will buy at 2x and then sell at .5x, x being intrinsic value.

 

I am trying to learn a bit more about the psychology of sellers as I am curious.

[Jurgis]

What is interesting to me is people will buy at 2x and then sell at .5x, x being intrinsic value.

 

Do you have concrete examples of this or are we talking completely abstractly?

 

Without examples, my reaction is that it might be obvious to you what x is, but it is not necessarily obvious to everyone and especially not necessarily at the time when stock is bought or sold.

 

Assuming that x is obvious, people would not buy it at 2x, but they might sell at 0.5x if they believe that price is going to 0.2x or if they are scared or they see other opportunities at 0.3y or they need money for something else (like covering margin, paying mortgage, etc.).

[BG2008]

I think it's the right choice to sell at lower price when the following happens:

 

1) Undervalued but capital allocation is atrocious which will destroy value over time, i.e. Blucora, the amount of value destroyed is absolutely crazy in that situation.  If management is hell bent on destroying value, there is NO margin of safety large enough. 

 

2) What you own will go to zero with no chance of coming back, i.e. Pinnacle airline, Bear Sterns, Horsehead, it looked cheap at $10, you should sell at $2, because it will go to zero.  I'm not talking about the fear of it going to zero, it's the fact that it will go to zero. 

 

3) You own something that's cheap, a net net that's got a real business.  You bought it at $10, it now trades at $8, maybe you're a seller at $12.  All a sudden, you find something else that trades $8 but is actually worth $20.  You take your loss and you upgrade your upside/downside.  IMHO, it's okay to take an actual loss in that scenario.  There is no sacred cow in my portfolio.  If Kraft sells for 5x cashflow, it will likely sell a bunch of other stuff to own it

 

4) The fact has changed.  You have a thesis going in for owning an investment.  Then you realize that the fact has changed.  You think something is ironclad, i.e. pipeline contracts, and it really isn't.  The company was supposed to be a consumable, but it's actually quite cyclical.  Your company lost its pricing power etc.  In those cases, you either got the intrinsic value wrong or intrinsic value has actually nosedive and the current market price is no longer at a discount to intrinsic.  So you sell. 

 

Psychologically, it feels hypocritical to sell at lower prices for value investors.  But there are times when it makes perfect sense to sell and preserve your capital. 

[randomep]

Remind us what it's like in a deep bear market when people are selling just because their pain threshholds are being met while ignoring fundamentals.  It has been a while since there was a real scare and many of us (including me) have forgotten.  I am really talking about the market or even a stock being down 20-30%.  What drives people to sell when stocks are cheap?

 

Stories appreciated.

 

I think you are being waaaaay to rational about this. The vast majority of investors don't know anything about stock valuations or any such. They simply invest in their retirement accounts and track their account balance. When a $500,000 401k balance drops by $150,000, they simply think oh my god, I've lost 8yrs of savings or something like that.  If they lose anther $100,000 or so they might just throw in the towel and sell no matter what logic you apply to them.

 

I have had many talks in the company break room explaining to people, don't think about your account balance, think of what you own. You own a piece of MSFT or KO or whatever.  This is especially true in the last few months.

 

 

 

 

[petec]

Remind us what it's like in a deep bear market when people are selling just because their pain threshholds are being met while ignoring fundamentals.  It has been a while since there was a real scare and many of us (including me) have forgotten.  I am really talking about the market or even a stock being down 20-30%.  What drives people to sell when stocks are cheap?

 

Stories appreciated.

 

I think you are being waaaaay to rational about this. The vast majority of investors don't know anything about stock valuations or any such. They simply invest in their retirement accounts and track their account balance. When a $500,000 401k balance drops by $150,000, they simply think oh my god, I've lost 8yrs of savings or something like that.  If they lose anther $100,000 or so they might just throw in the towel and sell no matter what logic you apply to them.

 

I have had many talks in the company break room explaining to people, don't think about your account balance, think of what you own. You own a piece of MSFT or KO or whatever.  This is especially true in the last few months.

 

Precisely.  And these people are, without knowing it, momentum investors.  Momentum investors comprise a lot of the market and are the polar opposite of value investors: they get excited when things go up, and they invest because things have gone up.  Similarly, they get scared when things go down, and sell because things are going down.  The faster they go down the faster they sell, until they've all sold and all that's left is value investors buying.

 

The other thing I would add to this thread is the power of an overarching idea.  They tend to be present at the tops of bubbles ("tech is going to change the world", or "peak oil") and I suspect they tend to be present at the bottoms of busts ("it's going to be the Great |Depression all over again" or "the ATMs will go dark"). 

 

In other words people panic-sell because a) things are going down and b) they have some overarching reason to believe things won't get better.

 

 

[petec]

As an aside, I believe animals (including humans) are quite deeply conditioned to see red as a danger signal.  So I find it fascinating that the convention is to display falling share prices in red and rising ones in green.  Tells you a lot about mass psychology vs. value psychology.

[ni-co]

As an aside, I believe animals (including humans) are quite deeply conditioned to see red as a danger signal.  So I find it fascinating that the convention is to display falling share prices in red and rising ones in green.  Tells you a lot about mass psychology vs. value psychology.

 

Except in China, where red is the lucky color and, therefore, it's the other way around. ;)

[Uccmal]

As an aside, I believe animals (including humans) are quite deeply conditioned to see red as a danger signal.  So I find it fascinating that the convention is to display falling share prices in red and rising ones in green.  Tells you a lot about mass psychology vs. value psychology.

 

Except in China, where red is the lucky color and, therefore, it's the other way around. ;)

 

Or if you are somewhat colour blind in the red -green spectrum. 

[Uccmal]

Remind us what it's like in a deep bear market when people are selling just because their pain threshholds are being met while ignoring fundamentals.  It has been a while since there was a real scare and many of us (including me) have forgotten.  I am really talking about the market or even a stock being down 20-30%.  What drives people to sell when stocks are cheap?

 

Stories appreciated.

 

You are speaking from a US centric approach.  Many sectors in

Canada are in a bear market.  I sold all of my US holdings except Seaspan and have invested in CDN. companies.  In the past year and a half I have sold very little at a profit.  Pennwest as an example.  I was out of it after taking significant losses into early 2015.  I re-entered in late 2015 and have since sold out at roughly BE.  I took the proceeds and went up the quality curve. 

 

I did the same in the past year with all of my US financials, although some had significant gains, when I sold. I redeployed the money at home in stocks that were trading at 52 week or multi year lows. 

 

Over the years I have trained myself to eat losses and move on to something better when the opportunity arises.  One has to get past the sunk cost fallacy on individual stocks, and look at the whole.  This still meets Buffett rules 1 & 2. 

 

We dont need to hold the shit stocks in the paper, tech, or oil industry, to make our money (back) when better opportunities abound. 

 

As to most people.  Most people are not 'successful' professional investors, and should stay out of individual stocks.

[SharperDingaan]

Value investors buying on the cheap don’t like to admit it - but there is very little difference between themselves and a pawn broker. We make money on other people’s misery and panic; putting out low bids in illiquid markets, in the hope of a fill. 

 

Most folks measure *unrealized* loss as years of future earnings; retirees *with no future earnings* perceive it as a permanent loss, and an adverse change to their future standard of living. Hardly surprising that it triggers emotional selling, in the hopes of holding on to as much as you can.

 

Of course, *unrealized* loss is just that – unrealized. If you hold quality; all you have to do it wait it out until the panic passes. A genuine Rolex watch is still a Rolex; either come back when you can afford to pay for it, or buy a ‘copy watch’ - your choice.

 

If this isn’t your thing, you should not be value investing.

 

SD

 

[LongHaul]

What is interesting to me is people will buy at 2x and then sell at .5x, x being intrinsic value.

 

Do you have concrete examples of this or are we talking completely abstractly?

 

Without examples, my reaction is that it might be obvious to you what x is, but it is not necessarily obvious to everyone and especially not necessarily at the time when stock is bought or sold.

 

Assuming that x is obvious, people would not buy it at 2x, but they might sell at 0.5x if they believe that price is going to 0.2x or if they are scared or they see other opportunities at 0.3y or they need money for something else (like covering margin, paying mortgage, etc.).

 

One example is just the entire S&P 500 - think late 2008 when Buffett said to buy and people kept selling.  The S&P 500 is super safe and in early 09 was cheap.  Clearly a lot of people sold at less than X.  2000 is another example where good safe businesses were available cheap while internet companies sold for 20x+.

 

I am trying to better understand why people sell when stuff is actually cheap - for the irrational reasons.

 

 

 

 

 

[CorpRaider]

"Margin call gentlemen."

[vinod1]

What is interesting to me is people will buy at 2x and then sell at .5x, x being intrinsic value.

 

Do you have concrete examples of this or are we talking completely abstractly?

 

Without examples, my reaction is that it might be obvious to you what x is, but it is not necessarily obvious to everyone and especially not necessarily at the time when stock is bought or sold.

 

Assuming that x is obvious, people would not buy it at 2x, but they might sell at 0.5x if they believe that price is going to 0.2x or if they are scared or they see other opportunities at 0.3y or they need money for something else (like covering margin, paying mortgage, etc.).

 

One example is just the entire S&P 500 - think late 2008 when Buffett said to buy and people kept selling.  The S&P 500 is super safe and in early 09 was cheap.  Clearly a lot of people sold at less than X.  2000 is another example where good safe businesses were available cheap while internet companies sold for 20x+.

 

I am trying to better understand why people sell when stuff is actually cheap - for the irrational reasons.

 

One can learn a lot just looking at this picture. I am not able to get a high quality image of this or else I would frame this in my room.

 

Vinod

[Guest longinvestor]

What is interesting to me is people will buy at 2x and then sell at .5x, x being intrinsic value.

 

Do you have concrete examples of this or are we talking completely abstractly?

 

Without examples, my reaction is that it might be obvious to you what x is, but it is not necessarily obvious to everyone and especially not necessarily at the time when stock is bought or sold.

 

Assuming that x is obvious, people would not buy it at 2x, but they might sell at 0.5x if they believe that price is going to 0.2x or if they are scared or they see other opportunities at 0.3y or they need money for something else (like covering margin, paying mortgage, etc.).

 

One example is just the entire S&P 500 - think late 2008 when Buffett said to buy and people kept selling.  The S&P 500 is super safe and in early 09 was cheap.  Clearly a lot of people sold at less than X.  2000 is another example where good safe businesses were available cheap while internet companies sold for 20x+.

 

I am trying to better understand why people sell when stuff is actually cheap - for the irrational reasons.

 

One can learn a lot just looking at this picture. I am not able to get a high quality image of this or else I would frame this in my room.

 

Vinod

 

Really good! It's a keeper, thanks

 

[LongHaul]

That is great!