Some thoughts about the market

Investment Analysis Clubs Saul’s Investing Discussions
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A nice quote from Tim Hanson:

For example, more than 50% of the trading that’s happening in the market today is done by computers or algorithms that are simply speculating on the price of the stock in the next millisecond. That means that more than 50% of the trading that’s happening is being done without regard to the business at all. And given that we focus on the business almost entirely, I think knowing that and recognizing that those forces are at work make it much easier to withstand the recent market movements.

And another from Jeff Fischer:

I’m always thinking in terms of rolling three years…so for any stock I own, I’m always looking ahead three years. And when the market’s going up on any given day, it’s just taking away from future returns. When it’s going down, like today, it’s adding to future returns. There’s no way around that.

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Saul,

This is really helpful. Thanks for posting-- this downturn is scary.

Nathan

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I’m always thinking in terms of rolling three years…so for any stock I own, I’m always looking ahead three years. And when the market’s going up on any given day, it’s just taking away from future returns. When it’s going down, like today, it’s adding to future returns. There’s no way around that.

Interesting quote. That raises the question to me of if current gains take away from future returns, then at some point, shouldn’t quick current gains be sold by that logic so that I don’t lose the opportunity cost during them time where I expect lesser returns per time period measured?

What I mean is if I have an expectation for 3 years out, and say half of that target is achieved in 6 months, then waiting the 2.5 years for the remaining half is actually a bad move because what I expected happened faster than I assumed.
Or perhaps I could take that to mean my projection was wrong and things are better than I assumed and maybe my 3 year expectation should be higher.

But this makes me think of the current group of FANG stocks, and also many of the SWKS, SKX, AMBA, etc. If you take out those somewhat
potentially “over-enthusiastic” runs the stocks had over the past 12-18 months, a lot of them are settling back towards primary trends (the FANGs still have room to fall in that sense).

Had they just been slowly marching higher over the past year without the volatility (both up and down), they very well may be at similar places to where they are now. But when the band gets stretched too far to one side, it often snaps back too far to the other…

It also fits in with the weighing machine over time theory, as good stocks can get ahead of themselves just as much as they can be underloved by the market.

Sounds similar to the way Saul adjusts around allocations or on short term unexpected things like a pop on a rumor or something. Curious people’s thoughts, as that what that statement says to me.

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A nice quote from Tim Hanson:

For example, more than 50% of the trading that’s happening in the market today is done by computers or algorithms that are simply speculating on the price of the stock in the next millisecond. That means that more than 50% of the trading that’s happening is being done without regard to the business at all. And given that we focus on the business almost entirely, I think knowing that and recognizing that those forces are at work make it much easier to withstand the recent market movements.

Is the first statement in the above paragraph even true? I have to wonder. If it’s true, how often it’s true. For which stocks is it true? I can’t image INBK being traded by algorithms. Maybe only stocks with very high trading volumes. Then you have to question what the effect of this high volume trading would be. Are they buying and selling a position in a matter of seconds? Or are they holding on for minutes, hours, days, or weeks? The holding period should be important in sustaining a direction in price movement unless the buying and selling is triggering other people to sell. Who can really know that? And if they know where are the facts to back it up?

I think it is very shaky logic to draw the conclusion that the reason that the stock prices of SWKS, AMBA, and SKX (and other companies with very low 1YRPEGs and great future business prospects) have fallen is due to automated trading algorithms.

Here are some other possible explanations (which may or may not have any merit):

  1. There is a lot fear in the market due to a major crash about every 8 years. Fear is causing indiscriminate selling which induces more selling due to margin calls.

  2. Some holders of shares are being forced to sell due to cashflow needs (governments that rely on oil revenue), excessive leverage (margin calls), or other investment losses (big losses in energy assets may trigger selling of other assets to rebalance allocations or other reasons).

  3. There is some unknown pending crisis looming. Deflation, currency war.

Who really knows for sure? Anyone who claims to know probably can’t prove it anyway so they can’t really know in the first place.

Chris

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Gaucho,

I think 1 and 2 are definitely true – but they are not mutually exclusive with computer trading. All of those can be going on.

But your #3 cannot be the case. Perhaps there is some crisis looming. As you said, who knows? But the crisis is not the cause of the selling. The fear of the crisis (your #1) is. I’m really not trying to nit pick – I think this is really important. The future crisis may be caused by the current fear, or it may be unrelated to the current fear, but it cannot cause the current fear. Because it’s in the future.

And that’s why stocks are down – because we don’t know the future. Or you could say that’s why stocks aren’t down further. I really don’t know if we’re about to rebound or drop another 20%. If that were clear it would have already happened.

I just know we are right in the middle of quarterly earnings reports, and a lot of businesses are crushing expectations. I don’t know if that means we’re more or less like to see a continued downturn, but I do know that we now have a chance to buy businesses that are fundamentally worth more money, for less. And that’s exciting. Even though a lot of us believe in being mostly 100% invested, there still can be opportunities to sell high and buy low during times of turmoil. I don’t have Saul’s years of experience to guide me, but I’m trying to be nimble.

And so I stand on the street corner and preach: Get rid of the riff raff in your portfolios! The NFLX’s and AMZN’s and FB’s. There’s no need for expensive stocks when there are so many bargains.

  1. Buy growing companies with low PE’s.
  2. Put your head under a pillow.
  3. Profit. (eventually)
  • The Bear
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The main reason for the market fall is simply stated (other factors are underlying reasons). That is a general, abject and fully-justified fear of recession in the presence of a) very high asset values as a result of artificial stimulus and artificially low interest rates, b) formerly unimaginable global debt levels and c) zero central bank firepower to combat it. In other words, people are starting to imagine what might happen if recession comes before we are ‘ready for it’. My own view is that central bankers have created a fate that we can never now be ready for it.

As a result, PE reversion to the mean is taking place. It may overshoot to the downside. Raise portfolio quality on the basis of high ROIC, low debt, pricing power, the ability to throw off free cash flow and the rest; ignore the sirens everywhere else. Learn how to be a value investor: we must not get out of date here! The world is turning.

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…and from Munger:

…This is the third time that Warren [Buffett] and I have seen our holdings in Berkshire Hathaway go down, top tick to bottom tick, by 50%. I think it’s in the nature of long-term shareholding that the normal vicissitudes in markets means that the long-term holder has the quoted value of his stocks go down by, say, 50%.

In fact, you can argue that if you’re not willing to react with equanimity to a market price decline of 50% two or three times a century you’re not fit to be a common shareholder, and you deserve the mediocre result you’re going to get compared to the people who can be more philosophical about these market fluctuations….

Cheers!
Murph
Home Fool
(looking forward to some good stocks on sale today)

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OT

http://www.marketwatch.com/story/charting-the-sp-500s-precar…

http://stockcharts.com/h-sc/ui
set the time to 3 years and the chart to solid line to see this best

This is chart based technical analysis ,something quite distinct from the quantitative analysis I do .I don’t directly invest based on this but use it as supporting data(my sales of my Saul type stocks were made months ago at higher prices)

FWIW , statistically this is a good chart patterns the leads to further market declines. Head and Shoulders tops are supposed to be the single most “reliable” chart pattern. Exactly how “reliable”? Who knows ,they are visual and thud too hard to exactly define.

For more read articles(or better yet the book) by Thomas N Bukowski

Past experience says this is PERFECT time to throw everything into the market.
I don’t know how long you have been an investor but I have been doing it for 50 years and never trust personal pst experience because is inevitably tainted with emotion and because 50 years is still too short a time . So I disagree…

No guarantee, I just like the odds to be on my side. At this moment enough damage has been done that 1) we may see indices rest area here for a while. 2) even if this is near bottom the SP500 is not going to go rocketing up past 2200 overnight.

Another strong point of this decline being based on more than local factors is that it is taking place world wide.
As always I hedge my strategic bets so have continued to hold a few high confidence Saul type stocks (including SKS and SWKS and AMVF) for long term B&H.

I agree with Chris that it is pretty much a waste of time trying to figure out why world stock market prices are falling. . They are falling because sellers have more urgency to sell than buyers have to buy. Some sellers must sell, few buyers must buy. Supply and demand.

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Fear is causing indiscriminate selling which induces more selling

Of course… each and every share that is being sold by some ‘quaking in their boots out of fear’ investor is being bought… by someone (or some algorithm running computer server?)

I’m not sure who all of the fearful sellers are, but I’m trying to be selectively greedy these days.

Greg
BJRI, DAR & LUK Ticker Guide

See all of my holdings here:
http://my.fool.com/profile/CMFGalapagos/info.aspx

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What I mean is if I have an expectation for 3 years out, and say half of that target is achieved in 6 months, then waiting the 2.5 years for the remaining half is actually a bad move because what I expected happened faster than I assumed.

I remember just before the real estate crash, Sam Zell, a highly respected real estate mogul, sold a huge property or set of properties. When asked why, he said that he always values his properties for what they would be worth in 5 years. The exuberant “fools” that bought his property offered what he thought it would be worth in 5 years. He could not turn that down. We all know what happened next.

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I remember just before the real estate crash, Sam Zell, a highly respected real estate mogul, sold a huge property or set of properties. When asked why, he said that he always values his properties for what they would be worth in 5 years. The exuberant “fools” that bought his property offered what he thought it would be worth in 5 years. He could not turn that down. We all know what happened next.

I guess it depends on what you own.

For a truly wonderful business, getting out after a quick-but-relatively-mmodest gain can be a very poor choice. I speak from experience. Far too often I’ve been happy with a quick 20-50% profit and sold, only to see the stock hundreds of percent higher 5-10 years later.

Think how many people are kicking themselves for taking a quick profit (“no one ever went broke taking a profit…”) in the early days of Berkshire Hathaway or Wal-mart or Fastenal or Apple or Amazon or…

Speaking of quotes from wise investors, Buffett has said that if you wouldn’t be fine owning a stock/business for the next ten years, then you shouldn’t think about owning it for the next ten minutes. Just think about how many of the investment errors you’ve had that would have been avoided if you consistently heeded that philosophy.

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Here are some other possible explanations (which may or may not have any merit):

1) There is a lot fear in the market due to a major crash about every 8 years. Fear is causing indiscriminate selling which induces more selling due to margin calls.

2) Some holders of shares are being forced to sell due to cashflow needs (governments that rely on oil revenue), excessive leverage (margin calls), or other investment losses (big losses in energy assets may trigger selling of other assets to rebalance allocations or other reasons).

3) There is some unknown pending crisis looming. Deflation, currency war.

While all those may have merit, one thing is absolutely clear: once a stock has had a sudden fall–regardless of the “original” reason(s)–the fall itself will cause many others to fear that everyone else must know something they don’t…causing them to sell.

It’s like if someone runs out of a mall in a panic. At first, maybe only one other person who sees that gets scared too, and also runs out. But now that two have fled, a couple more people get freaked out and exit. And now that four people have gone running out in a panic, this pushes another eight people past their fear/uncertainty threshold, and they’re out of there. Rinse and repeat…and you have a stampede for the door. It’s human nature…and also fits with the teachings of complexity theory. And if you 1) don’t understand that, and 2) don’t have a deep conviction in why you find the businesses you own attractive at the prices they’re at, then, at a minimum, you won’t be able to take advantage of the panic. Or worse, you’ll make the tragic mistake of selling out at an unreasonably cheap price.

I think this is exactly what is happening with Skyworks now. During the fall, it fell–for whatever reason. Then it fell some more when people had their yearly Apple-is-doomed moment. And once it started falling, many people figured something must be wrong, and they sold…and now it’s at a stupidly-cheap 10X current-year earnings. Same thing that happened to Apple back in 2012-2013, when it got cut in half…only to double in the next couple years.

As Benjamim Graham said, Mr. Market is there for you to take advantage of. But if you let him inform you, you will not do well investing.

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