At 822 the S&P 500 is down 8.9% YTD. Someone doing well thus far might be able to see breakeven versus December 31 and anyone struggling a little might be down low double digits. With that sort of range, anyone prone to emotion is probably in a less emotional state than they were two weeks ago. The sigh of relief I'm describing could promote some clearer thinking.
It would have been reasonable to see a stock owned trading at an absurdly low price and to wonder why it was still in the portfolio and to further think "geez if it gets back to $X I'm going to sell it." For most stocks, selling when it gets back to $X is probably the wrong trade for the long term.
One of the two mining stocks in my ownership universe (both are down a lot) got down to a sickeningly low number before bouncing 60% in about ten minutes (intentional hyperbole). Quite frankly, most of the stocks that you or your friends or your neighbors are worried about are going to survive and go on to make new all time highs. This is a point I have made before with the caveat that the time needed may end up seeming like too long or not be that bad, we'll see.
Let's pick a name at random that I do not own and have no plans to own; Deere & Co. (DE). At the current price it is down close to 2/3's from its high. At its worst it was down 3/4's and is now up 41% off of the low. According to Yahoo Finance it has earned $4.38 in the trailing 12 months and is estimated to earn $3.23 in 2009 and $3.07 in 2010. Even if you slash those estimates dramatically because you distrust the analysts the company is still very likely to eek out a profit while being able to service the debt--it does have a lot of debt BTW.
I'm not making a case to buy the stock, I'm making the case that it won't go to zero. Won't go to zero is not a reason to buy. I'm sure there is a bull case for the name but this is really just an example. Many of the people who own this stock are down a lot as you probably are with most of your stocks, as I am with most of the stocks I own personally and for clients. In my opinion there is no question that DE will work back to that high again as will many stocks but I have no idea if DE will make it back faster or slower than the market.
More important that stocks being down a lot now is defensive action taken hopefully early on in the bear cycle.
The point of all of this is selling a stock just to sell because it is down a lot is very likely the wrong trade. This is not to say that you shouldn't adhere to some sort of defensive strategy or consider reducing exposure after a a big rally in this environment. This is subtle and I may not articulate it well but the mind set of if ABC gets back to $X per share I'm out is more about emotion than logic as opposed to after an X% bear market rally I will reduce my net long exposure by adding an inverse fund or reducing exposure to something that bounced on emotion not reason or both. Hopefully that distinction is clear.
11 comments:
It's good to have a plan. I'm finding this is a good time to re-examine my asset allocation and rebalance; I've gotten much less diversified thanks to Mr. Market's gyrations. That framework gives me more discipline and takes the emotion out of selling at point X for any individual position.
I don't know if it's a Boston thing or an age thing, but you and I watch the same exact movies....
Lance Armstrong: Quit? You know, once I was thinking about quitting when I was diagnosed with brain, lung and testicular cancer, all at the same time. But with the love and support of my friends and family, I got back on the bike and I won the Tour de France five times in a row. But I'm sure you have a good reason to quit. So what are you dying from that's keeping you from the finals?
Peter La Fleur: Right now it feels a little bit like... shame.
Lance Armstrong: Well, I guess if a person never quit when the going got tough, they wouldn't anything to regret for the rest of their life. But good luck to you Peter. I'm sure this decision won't haunt you forever.
What does this have to do with finance?
lol, you're not from Newton are you?
speaking of sports - this market of late is kind of like boxing where it is said... "Everybody's got a plan...until they get hit in the mouth".
Roger,
my question at this point is if the market is correctly priced. In 1987 the dow was in the 2000 range and today after 22 years it is in the 8000. That is a 6.5% return. If we had an 8% return that would be 10,000. Genrerally the overall return on the market is 8%, but giving the state of the economy we are at 20% discount from where we should be. Perhaps, correctly priced at 8000. The other question is would we see 10,000 or 4000? Or perhaps we will trade between 5000 to 10000 for the next 5 to 7 years. I am inclined with the latter that we will establish a trading range for the next 5 years. It is 5000 to 10000 or perhaps 13000. Like after the bull of the late '60s.
Best,
Jeff from milan italy
correctly priced? i don't frame it that way. is demand consistent with positive returns or not is how i frame it. currently demand is unhealthy. it may make sense to do a little buying even when demand is unhealthy but i care about defense versus fully invested.
Roger:
How can you compare values in an index (Dow) that has been changed with time and has survivorship bias?
Sam
i don't have a scientific answer but what I would say that as a proxy for economic activity in a country (the US), the evolution of industry in a country I think it stands up.
Roger,
I'm assuming (maybe I shouldn't) that you're saying that "getting out when X hits $Y" being a bad move if the reason for selling is "I don't want to be in this market anymore", or if the seller is going to "chase" something that's currently hot. Am I correct?
Reason I ask, I pulled the trigger on a holding that had been WAY under water, and had risen nicely (along with the market) over the last few weeks. My thinking is that with a re-test of the market lows, I can buy it back a lot closer to its 52 week low. Like DE, its not a "bad" company (imho), nor will it go to zero.
Jan
it is a good bet that most stocks could be had cheaper on a re-test.
if an investor is better off long term with a certain stock then he runs the risk of not buying it back out of some sense of fear on a run down and of course the stock in question could rocket up tomorrow never to be had again.
My comment was more about the emotional failings of most folks.
The most important diversification decision is the stock/bond mix, not how much to invest in US blue chips, International, Small Caps, REITs, etc. 2000-2003 and 2008-? are excellent examples. Stock/bond mix diversification works all the time, especially during "flight to quality" when equity correlations increase.
Post a Comment