This post is stand alone.
For those who have the time to read a century of comments to get the context and perspective, you may want to read this old post: Here's a question to Value Investors.
When to buy
When do Value Investors buy?
They buy when they can find a stock that is selling below its "fair value".
There are quite a few metrics to use, but fair to say these "fair value" metrics can be "calculated" from published quarterly or annual statements.
Teaching or learning these metrics is easy. There are formulas, excel file templates to fill-in, numbers to crunch.
All very black and white stuffs.
When to sell?
When the reason you bought was because there was a "discount" to fair value, then the logical "catalyst" to sell is when that "discount" is no longer present.
That's what the pros do.
After the sale, they go hunting for other stocks that are selling below fair value.
Buy, sell, rinse, and repeat.
If they can't find stocks selling below fair value, they don't bite.
Retail Value Investor don't have the same playbook
The competent ones do buy at discount to fair value.
But when the stock price has risen to fair value, that's where retail value investors deviate from the pros...
Nope, can't sell.
What if after selling the price goes higher?
Now these retail value investors have transition into Peter Lynch's Growth at Reasonable Price (GARP).
And when the price has soars to more than 2 standard deviations from fair value, with P/E multiples that will make any true blue Value Investor puke, now the same retail value investor will morph into a Growth Investor like Philip Fisher.
No worries!
See? I made a mistake with my "fair value" calculations. The stratospheric price today is the new "fair value". So there's lots of room for price to go much up before everything is overvalued!
What?
Am I making it up as I go along?
No way! Look, I'm a LOOOOONG term investor OK?
When shit hits the fan
Its not so bad if one transitions into GARP or Growth Investing from a Value Investing mindset,
All of the above entry methods have their own exit strategies.
But if we morphed into a long term buy-and-hold strategy mid way, that's similar to the joke traders use to mock themselves - letting a trade become a long term investment - you know it usually does not end well...
When do Value Investors buy?
They buy when they can find a stock that is selling below its "fair value".
There are quite a few metrics to use, but fair to say these "fair value" metrics can be "calculated" from published quarterly or annual statements.
Teaching or learning these metrics is easy. There are formulas, excel file templates to fill-in, numbers to crunch.
All very black and white stuffs.
When to sell?
When the reason you bought was because there was a "discount" to fair value, then the logical "catalyst" to sell is when that "discount" is no longer present.
That's what the pros do.
After the sale, they go hunting for other stocks that are selling below fair value.
Buy, sell, rinse, and repeat.
If they can't find stocks selling below fair value, they don't bite.
Retail Value Investor don't have the same playbook
The competent ones do buy at discount to fair value.
But when the stock price has risen to fair value, that's where retail value investors deviate from the pros...
Nope, can't sell.
What if after selling the price goes higher?
Now these retail value investors have transition into Peter Lynch's Growth at Reasonable Price (GARP).
And when the price has soars to more than 2 standard deviations from fair value, with P/E multiples that will make any true blue Value Investor puke, now the same retail value investor will morph into a Growth Investor like Philip Fisher.
No worries!
See? I made a mistake with my "fair value" calculations. The stratospheric price today is the new "fair value". So there's lots of room for price to go much up before everything is overvalued!
What?
Am I making it up as I go along?
No way! Look, I'm a LOOOOONG term investor OK?
When shit hits the fan
Its not so bad if one transitions into GARP or Growth Investing from a Value Investing mindset,
All of the above entry methods have their own exit strategies.
But if we morphed into a long term buy-and-hold strategy mid way, that's similar to the joke traders use to mock themselves - letting a trade become a long term investment - you know it usually does not end well...
Sound like Pokemon retail investors. Got evolution and power up. :-)
ReplyDeleteCW,
DeleteThis post is like an autobiography of me making every mistake in the book...
LOL!
That's the advantage of going through my "capitulation" moment after the dot-com crash.
Lots of time to do reflections when you are at rock bottom :(
Value investing's exit strategy is much easier - provided we not greedy. It's black and white.
GARP and Growth investing's exit strategies are a lot harder...
Its all grey grey fuzzy fuzzy thing called growth expectations - based more on opinions and forecasts rather than facts.
When do you sell Growth companies like Facebook, Google, and Apple? How do we know they won't become the next Nokia, Blackberry, or Kodak?
That's why everyone behave like "Growth Investors" but will dare not call themselves one.
Why?
How to reply when people ask them when to sell Growth stocks?
Don't look at me!
temperament,
ReplyDeleteThat's where some retail investors have delusions of grandeur thinking they "owned" a business just because they have some lots vested.
No, you just owned a "paper" financial asset; not a business.
Being a stock investor and a business owner are two separate thing.
The biggest advantage small retail investors have over institutional pros is we can slip in and out without causing any waves ;)
i think you raised a good point about being a stock investor versus a business owner, and seems to point to people like me who tend to tell people to look at stocks as business. we own stocks not business.
ReplyDeleteand yes there are failings of owner operators which we are not. we own a shareholding to it.
i will learn this lesson from you.
we should not evolve our idea when we realize that the speculation have become a viable long term play.
Kyith,
DeleteUnless we own enough shares to get a seat in the boardroom and have some influence as an activist investor like Carl Icahn, its best to remain at our own quadrant.
And that's where most people who read Rich Dad and Poor Dad got side-tracked...
The whole book is all about the advantages of having a business and being a business owner.
That's where we can leverage on Other People's Money (OPM) and Other People's Talent/Time (OPT).
Just airing my own experiences and reflections.
Diversity in views are always welcomed since my posts are just "throwing brick to attract jade" ;)
as a practioner, it is difficult to teach people. this is because in one part you need to teach people less about short termism. yet you have to teach on when to spot things are not going well.
Deletethe way i deconstruct is that not being an owner operator is a big problem because even those activist investor who lets be clear, have a better research resources then us, and secondly they have more access to management. if they got into a fix(bill ackman for valeant, and guy spier and pabrai for their horsehead capital debacle) then what should we do?
it is a question that is still in my head till today.
Kyith,
DeleteIts good to have doubts and ask what if we were wrong?
We get hurt the most when we are full of confidence and things turned out differently ;)
I am still bemused when people tell me Singapore banks safe one lah! If this and that bank fails, Singapore will fall.
Well, obviously these people do not read the news or know much financial history...
Italy may soon nationalise the world's oldest bank this weekend.
I guess people have forgotten about Lehman and Barings. And what happened to banks in Iceland and Cyprus too...
OK, AIG is not a bank, but still... Company still around; but investors got diluted until at best they got 10 cents on the dollar back...
Who is bigger? AIG at its prime before GFC or one of our local banks?
The way our 3 telcos have fallen in price may have tested the convictions of some of our "long term retail investors" who think telcos are defensive - it is if you are the monopoly.
As a business owner, who cares about share price if I can take the company private for a song compared to my IPO price?
Just as long the company survives I'm OK.
When spring comes, can re-IPO again. Rinse and repeat.
But as a shareholder? I can get screwed...
actually all true. unless if i tilt this around and ask you what if its your friends company that ipo and you know his integrity.
Deleteits still a difficult proposition.
the price tells us much sometimes that things are not right...
Kyith,
DeletePrice action - its the collective wisdom of the market.
As for your question, that's why there's a saying never mix business with friends ;)
temperament,
ReplyDeleteOnce we start to discount future cash flows, we already have 1 foot into the Growth Investing...
That's why Growth Investing is grey grey fuzzy fuzzy as you have aptly describe - we are attempting to guess the future.
One version of Value Investing don't care much for future cash flows - they just care about its liquidation value.
But other branches of Value Investing do care about future projected earnings and incorporate them into their intrinsic value of a stock.
In fighting begins ;)
"Price is what you pay, value is what you get"
I find it cute how retail investors have a simplistic way to explain between Growth and Value.
If price drops a lot, quick buy! Its a Value play!
If price goes up a lot, quick buy! Its a Growth play!
And when price goes up after we bought, I am right!
When price goes down after we bought, market is oversold. Buy more!
Price Action triumphs!