Buy Low Sell High Is the Actual Answer
Great investors like Warren Buffet, Sir Templeton, John Kenneth Galbraith, Joel Greenblatt, Howard Marks, Mohnish Pabrai, Nick Sleep etc. all use this approach. And their appetites for adventure and risk are, or were in a couple of cases, VERY different. These investors all accumulated wealth in the hundreds of millions of dollars. They are big winners in the game of monopoly. So what do they all do that Warren Buffet’s “Mr. Market” average investor doesn’t do? They buy low and sell high. The average individual investor chases returns meaning they invest in stocks or other asset when they see them doing well. “Look at how Bitcoin has risen”, Ms Market says and she jumps into bitcoin because it has captured her imagination. Then as it crashes a few weeks or months later, she jumps out, frustrated with herself for “missing the boat.” One must reverse this and jump into the asset BEFORE Mr. or Ms Market thinks there is value there. You need to buy it while it is still cheap relative to its value. And then sell it when everyone else thinks it has value.
How To Find the Assets
I am reminded of that circular advice; “If you are asking this question… you are not ready for the answer.” That’s not helpful… but it is sort of true. The investor must determine the worth of the asset, often examining large quantities of assets, to find one that is mispriced. The more you search in obvious places, like the DJIA stocks, the longer you will have to wait (because so many other people are looking in the obvious places). Alternatively, you can also buy a fairly, but not over, priced asset and just plan on holding it for a long time. Even then you should wait for a market pull-back before investing in your reasonably priced asset. The key is to remember that you are buying an asset. A business or an income stream that has underlying value, not just a chip in a casino that you expect to rise in value. If the asset is valuable then the market will eventually recognize it, provided there is a free market for the asset.
This takes discipline. Hence the admonition; “If you’re asking…” If you were patient or even super curious, you would probably already be doing this. It has been suggested, without evidence I might add, that a touch of “being on the spectrum” is helpful here. You need to be comfortable reading about financials for long periods of time. When it comes time to trade, you need to be comfortable being alone and not explaining yourself to others.
How To Have Cash When You Find An Asset
This is, frankly, where I was challenged for most of my investment career. I knew when we were in a trough. EVERYBODY knows when the market has slumped. So if you know that’s a time when pickings will be especially good, what’s stopping you from buying. Likely two things. The first is fear. Fear we should have overcome above so reread that last section and satisfy yourself that the asset you’re looking at really is THAT good. The second is cash. You need cash to buy the asset. Now, if ALL your investment cash is tied up already in assets whose prices are now depressed, it’s an especially BAD time to sell to raise cash in order to buy. Instead hold onto those other assets. So what cash do you use? Cash you raised while the other assets were appreciating!
While the market is rising, in addition to the discipline to be searching for assets to buy someday, you need to be, in blackjack parlance, taking some money off the table. There are a couple of methods that work for this and you have to pick one that suits your temperament and makes it easy to be disciplined about it:
Use tranches of stocks. A set number of issues you will hold. You balance the tranches initially so that each tranche holds say %5 of your portfolio. Then, as some positions out perform others, the tranches get mis-weighted. Rather than simply rebalancing them, take some or all of the overweighting value and convert it to cash. That means you’re selling out of winning positions as they win.
If you are a STRICK value investor, you can set targets for each asset you own. For instance you’ll buy a particular stock at 25% of its intrinsic value and you will sell when it reaches 80%. This rule means for any asset you will more than treble your investment. …of course it also means that you are doing your homework and know the value of the asset, separate from what Mr. Market thinks.
You can attempt to time the market. I’m sure you’re already saying; “But isn’t that a bad idea? My financial advisor says you can’t time the market.” And your advisor would be right. You can’t know. No one can know what will happen next in the market. In March of last year did you, or your advisor for that matter, see that last year would be one of the best years to be IN the market? That having been said, you CAN see when the market and a particular issue are over heated. A good friend of mine has a stock screen that looks only for stocks with P/Es that indicate they are trading at or below 20 times earnings. He liquidates somewhere above there. You can also get a P/E for S&P 500 as a whole. When it’s above 20, stocks are starting to get frothy, like a beer with too much head that is mostly air, not beer. Once there is more air than beer in a stock, it’s time to convert some or all of it to cash in order to find the next bargain. The key here is to set a target and stick to it. Either for each stock or for the market as a whole.
Now I hear you asking how much cash is enough? That depends on you. The big guns consider 15% cash a lot of cash to have on hand. But some of the big guns that are not afraid of what the market views as risk will have a very few positions and a lot of cash waiting for deployment on the down draft.
What About My Business?
Same thing. You need to get cold about it and get a real sense of the value of the asset you own without regard for what other people think or for what Mr. Market thinks about businesses in general. Because YOU live with the decisions you make. …well you and your family and heirs…
Call To Action
Read Richer, Wiser, Happier by William Green. He does a great job of outlining the behaviors, policies and quirks of the worlds greatest investors; the ones I listed above and several more.
1. Decide whether to DIY or pay someone to do it. (Either way YOU live with the results.)
2. Establish an understanding of the investment landscape and what you might like to own.
3. Wait for it to go on sale.
4. In the meantime, sell out of positions as they are rising. Not so much that you significantly reduce your earnings on the great buys you’ve already made.
5. Pounce with confidence when the asset you want is on sale.
One final word. I am telling you to understand assets and the markets. I have NOT recommended any assets for you to purchase. You are on your own here and you live with the results.
Here’s the link to William Green’s Book.
I hope you found something to apply to your business in this MBR. Let me know either way.
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