Opportunity Knocks

I just have to say that we’re in a situation right now that investors dream of: many wonderful companies at fire-sale prices. This is the kind of thing that powers market-thumping portfolios for many years to come. It’s not as good as 2009, when everything was on deep discount, but certainly for some companies it’s pretty amazing right now.

We look at the opportunities at companies differently than the broader market does. If we didn’t, then there wouldn’t much chance to outperform. In many ways, the difference is time horizon (if my investment thumps the market over the next 3-5 years, who cares what it does this year?). But I think we also get to know the businesses closely, which should lend us confidence in our investments.

So why is it that when the market turns so negative, we let it affect us? Why do we suddenly think the market knows something we don’t? And right at the very moment when opportunities are ripest, when we have the best chance of earning a long-term profit?

Don’t fall for it. This is a time to be buying those companies, not selling them. Is it guaranteed these companies will go on to beat the market? Of course not. There is always risk, always uncertainty. It’s always possible that this is the beginning of the end for some of those businesses, and that they’ll never recover. But that’s always true, even the risk isn’t flashing in neon all the time. That’s why we have a portfolio, and we don’t put 100% in one or two companies. We have a maximum percentage of capital we’re willing to risk on any one idea – no matter how great or sure it seems – and that keeps disaster at bay when some of those ideas inevitably don’t work out.

Watching the value of your portfolio drop today isn’t much fun. But I doubt anyone reading this needs 100% of that portfolio capital today or this month or this even year (even if you’re retired). We invest for the future, and what matters is the value of our portfolio years down the road. Opportunities like those we have now are what allow us to set ourselves up for that long-term success.

I have no idea where the market will go from here, or if the share prices of our companies will continue to drop (perhaps even significantly). But forgetting about that for a moment, and looking ahead to the future, I personally am excited about the opportunities for long-term returns.

Just a thought this morning.

Neil

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Neil,

There isn’t much opportunity if one is near or close to being fully invested.

How much cash do you have for these opportunities and are you planning to put it all to work right away?

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There isn’t much opportunity if one is near or close to being fully invested.

Perhaps you already have the perfect investment portfolio. If so congratulations, it is irrelevant that the market has gone down!

But if you are not satisfied you are perfectly invested, the answer to your question is in Saul’s recent post: A bit of philosophy on a dark day.

http://discussion.fool.com/a-bit-of-philosophy-on-a-dark-day-320…

Some companies have been hit harder these past weeks than others. Some companies have even risen in price! So I’ve sold positions in some of those better performing stocks in order to buy SWKS and SKX.

As an example from my own portfolio:

Monday: UFCS is up 0.5% YTD. Sell entire position.
Thursday: SWKS is down 18% YTD. Buy at 62.17 (down 19% YTD)

UFCS is nothing amazing, but it has given steady low-risk returns. Not much potential for it in the current market. I would rather move my money to SWKS to take advantage of the opportunity created by the current market.

I will continue to make trades like this as I see opportunities that improve on my current investments.

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As a side note, as of the start of the year I had less than 1.5% in cash yet am very excited by the opportunities I see!

I, for one, am never “fully-invested.” I need money to live on. I wonder if Saul has a pension or some other sort of regular income, given that he indicates he is always fully invested and has to sell shares of a company to purchase shares of another.

I agree that opportunity is knocking, and I’ve purchased additional shares of good companies at these low levels.

I have a friend who claims she lost $100k in 2009, but I remind her that she wouldn’t have lost the money if she has held onto her stocks. Unfortunately, she needed the cash to live on.

I had the same thoughts, but I literally am 99% invested. I chose to sell CYBR(Up 22% yesterday) and MKL (Down a bit but not as much potential growth/excitement as I would want) for LGIH and more SWKS… too bad SWKS is already about 22% of my portfolio or I would by more.

After finishing the year 15% up, I’m currently 12% down this year.
I had about 2% in cash, which I’ve bought SWKS, half at 72 and again at 62.

Currently I have some major losers sitting in my portfolio, mainly WPRT GTLS, XPO. The total value being pretty insignificant, but the lost money a lot. Basically I’ve been sitting on them so that if I had a year where I haven’t taken profits, I could sell them and carry over loses for future, hopefully more prosperous years.

So the decision at the moment is to use this opportunity to do just that, rather than sell some shares that haven’t been hit for a profit, reallocating them to downtrodden stocks. The year end date in the UK is April.

Ideally I’d just have more dry powder laying around!

It all still hurts though, bearing in mind how rosy everything looked last July, 35% up YTD at the time. It’s been a long train-wreck since!

There isn’t much opportunity if one is near or close to being fully invested.

How much cash do you have for these opportunities and are you planning to put it all to work right away?

I’m more or less fully invested. One of the nice things about this not being 2009 is that a number of companies are still trading at or above a reasonable estimate of fair value, despite recent drops in share prices with the broader market (MasterCard is one random example from my portfolio). I’ve been reallocating capital away from those and towards companies that I think are very undervalued at the moment.

To be clear, that tends to lead to increased volatility of the overall portfolio. That’s just one of the trade-offs.

Neil

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Hi Neil,

I appreciate this topic, because when the market goes down, I tend to freeze and get stuck on whether to buy things or whether to just sit it out.

Right now I have 30% in cash, and a bit more if you count cash secured puts. I am considering writing some puts, and buying some shares, maybe spending 5% - 10% of the cash. But so far I have not done anything. I am just watching. I usually don’t move quickly when these things happen and I have missed the lows before.

Guess I’ll have to make a shopping list. (Can’t talk specific names right now!)

Karen

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And right at the very moment when opportunities are ripest, when we have the best chance of earning a long-term profit?

Given current valuation levels, I would expect the S&P 500 to drop to around 1100 in the next recession.

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Neil:

I’ve been thinking along the same lines, this looks like the opportunity of a lifetime but my strategy differs. I don’t see any reason to buy before the market turns, there should be several years of growth after it does. I’ve separated my candidates into two groups: cyclicals and perennials. Perennials one can buy sooner but one should wait with the cyclicals.

Once upon a time I used to be fully invested but recently I’ve decided to hold cash as my safety hedge and to take advantage of opportunities.

Happy hunting!

Denny Schlesinger

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Doesn’t feel too opportunistic yet… Maybe for a shorterm bounce, but opportunity of a lifetime? Not close. Early 2009 was the opportunity of a lifetime.

As people have said, doesn’t matter how much the opportunity knocks when most of the account isn’t in cash. Best case you can reallocate the decreased dollars, wait it out if you are happy with your positions, or take your lumps, get out and wait if you think things are going to get worse before better.

And therein lies the problem. Personally I’ve been trying to be a long term investor, but don’t really feel comfortable at the moment allocating more than 30-50% of the account at max that way when what I am seeing everyday has contradicted reasons to be mainly holding stocks long.
The rest I’d add back as long as things can hold a trend.

Not saying to not invest long, but set rules to limit drawdowns and losses in markets like this to avoid playing from behind and needing to make up ground. Last 15 months or so of market action have been pretty bad and I think there are better deals to be had later this year

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I’ve tried to be defensive taking profits in IONS and ABMD and selling against the highest priced shares in those tickers with specific lot sales. This served two purposes. Lowering my cost basis and recharging cash to buy them back lower. Other stocks like FB I am willing to hold and add when I get my price.

Rob

when what I am seeing everyday has contradicted reasons to be mainly holding stocks long…

…set rules to limit drawdowns and losses in markets like this to avoid playing from behind and needing to make up ground

Just a quick reminder that the market’s long-term average returns include the absolute worst, nastiest markets in history – they’re averages, after all, so they include both the good times and the bad times. Those returns occur despite those terrible periods. And if you’re able to take any advantage of those down periods whatsoever (regardless of whether you call the bottom or not, regardless of whether better opportunities arise later or not), then chances are high that your long-term returns will be even better.

Personally, I think it’s extremely difficult to predict where the market will go in the short term. That’s what everyone else is trying to do, including brilliant people on Wall St. that are backed by massive funding, incredible technology, and often an insider edge (whether legal or not). And, by definition, you’re putting yourself at the mercy of market whim. Unless one has consistently called all the prior tops and bottoms, I don’t know why one would expect to suddenly be able to do so going forward. Personally, that’s not a game that I have any desire to play.

But I can look at the likely long-term trajectory of a business based on my understanding, and ask if current share prices represent a great long-term value. That’s a much, much easier game to play, and one that doesn’t leave you exposed to short-term market whim. Over time, price will align with value. Mistakes will be made, of course, but the math is very much on your side: you can make a lot of mistakes and still come out quite ahead.

We’re bombarded all day long with short-term concerns, and so it’s only natural to let that begin to dominate our thoughts. But the short term doesn’t matter over the long term: it’s a red herring. It doesn’t matter if you buy right at the bottom, or if shares continue lower after you buy. All that matters is that your actions today set you up to meet your financial goals down the road. I don’t think stressing yourself out over the short-term impact of every decision is likely to be productive.

Finally, it doesn’t have to be a binary decision where you either commit everything or nothing. There’s no reason you can’t ease in (or reallocate) over time based on the potential future value you see.

Again, though, all just my 2 cents. Everyone’s style is different. What matters most is that you find something that genuinely works for you.

Neil

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Very good Neil.

Frank

Neil, appreciate the comments, and you make very good points.

My point is more that I don’t care about the market’s long term average returns, I care about my personal n=1 long term returns.

I agree that short term predictions are very difficult to make and the shorter the timeframe, the more random the variation of those predictions will be.

As you say investing styles and situations are all different. For me, new investment capital is likely not going to be able to be added in the near term, and a primarily long US equity portfolio is actually contradictory to my personal opinion of intermediate term macro trends. I don’t like having to bet against what I think.

I think the long term trajectory of a lot of these business are certainly intact, but the price action of the securities is divergent from that. Yes, that is where the opportunities to buy come from but it’s not an opportunity when you buy with deflated dollars.

Number one rule is to protect my own capital in the intermediate term. I’d rather miss a few points of gains and have the capital to invest elsewhere when opportunity arises than watch some things fluctuate through large drawdowns. It’s that really annoying problem where you end up wrong even when you are likely right.

In reviewing many of the past years, some of the biggest losses have been from giving back a portion of unrealized gains on investments in great companies. Gotta put a cap on that so I’m hybridizing my approach going forward and am capping the “LT buy and hold unless the story changes” strategy to 50% of the portfolio max.

The rest can grow to that status over time so log as business performance AND price action continue on an uptrend.
More my risk management thoughts as I’ve spent a lot of time recently tweaking to a process that I feel comfortable with. Posting in case it helps anyone else

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In reviewing many of the past years, some of the biggest losses have been from giving back a portion of unrealized gains on investments in great companies.

Is this because they went up, giving you paper gains, and then they went down and you sold, missing some portion of the paper gains? What would have happened to those same investments if you had just continued to hold? Or, had they ceased being great companies?

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Is this because they went up, giving you paper gains, and then they went down and you sold, missing some portion of the paper gains? What would have happened to those same investments if you had just continued to hold? Or, had they ceased being great companies?

It’s actually because I held them after the trend changed as I gave them too much benefit of the doubt. I do think they are still great companies. However that let the large paper gains turn into smaller paper gains creating an opportunity cost of capital and time. See SWKS, AMBA, etc

Some I got out of like BOFI because the story (no longer a great company IMO) and trend changed so that was an easy decision.

Others I cut back position sizes or got out of when the trend changed like MNST, ILMN, WAB, etc. Still great companies but wasn’t worth the risk anymore. Happy with those decisions at it realized more gains than I’d have on paper right now and it’s easy and cheap to get back in when they are worth risk again in my opinion.
Yes taxes can be a bugger but in an IRA that doesn’t matter and commissions are much cheaper than drawdowns.

Plus I am more comfortable defining my risk to a certain amount, which is really the main point of some tweaks to the process.

While I understand managing risk, my question was exactly because there were a bunch of people who came through the great recession just fine by doing nothing. In many cases, people who were hurt pretty badly were those who sold late, thereby realizing losses, and then bought back in late because they were spooked. To be sure, there are those who were hurt, even if they kept what they had, because the companies were ones which either didn’t recover or took a long time to recover because they were particularly impacted or even a part of the problem. Now, clearly there were some particularly dramatic examples around the 2000 bubble where it has taken a long, long time to recover prior value, but I think that panic is the source of a lot of loss, especially since it often comes too late to be of real use.

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2008 I didn’t sell much of anything, but the main reason I came through just fine is that I could add a decent amount of new capital throughout the year. And most of my best investment returns came from what I bought back then.

Without adding new capital a lot of time would have been lost watching an account go nowhere. You may say that’s part of the game but personally I’d rather play a different game, particularly since my situation is different now and it may be some time before I have the ability to add new capital to take advantage of bargains.

There are a lot of great companies out there where anyone who bought the stock in the last 12-18 months is already severely underwater. A lot of those companies are favorites of this board and ones I like too. Some of them I have positions in.

Perhaps I’m annoyed and venting because I ignored some signs and my own judgement by rationalizing declines below a certain point because the business was still performing well (at least based on the quarterly updates of ER).
Take SWKS for example. Love the company. Looks super cheap here. I think they have phenomenal growth ahead of them. In July, slightly off the highs (which is ok) they announced great results, beat estimates, and raised guidance… and then started on a downtrend to lose over a third of value in 6 months. It was clear it lost the love from the market as it has lost price level after price level. Still think its a great company and will be a phenomenal investment, but at this point it’s a coin flip if it’s up or down more from here.
I’d add more either if the trend changes or if the price gets into the mid/low 40s. If it doesn’t bounce hard here, that’s where I think it’s going short term.

In my opinion there is no reason to allow unrealized losses like that to actually happen. Despite the name, they are still real in the present as that is the value today. They cost time out of your long term horizon while you wait for them to come back and they cost opportunity during that time to allocate money elsewhere or to the same company at a better price. Yes investing is about finding the future value in the long term and all, but that is so much easier to do with tighter risk management in the short term.

Maybe no one cares about this type of topic so will stop the rant on it, but I think it’s worthwhile. One thing this board seems to do much better than the MF in general is be willing to sell things when things change. Well price action and trend changed and irrationally cheap can certainly become insanely cheaper. I missed it this time, but that is part of the reason I’m working on better rules to improve my portfolio management.

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