tag:blogger.com,1999:blog-5389144729834496735.post1698727620518334905..comments2024-03-17T05:15:55.634-04:00Comments on The Brooklyn Investor: Quick Comment on the MarketUnknownnoreply@blogger.comBlogger10125tag:blogger.com,1999:blog-5389144729834496735.post-40942874021817912022012-10-11T05:04:42.412-04:002012-10-11T05:04:42.412-04:00This comment has been removed by a blog administrator.how to sell a small businesshttp://www.diybizseller.comnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-66678348639051940642012-08-21T00:02:46.178-04:002012-08-21T00:02:46.178-04:00Great discussion guys.
I especially like the poi...Great discussion guys. <br /><br />I especially like the point about owning only as much stock as you can bear moving down 50%. I largely agree with the Buffett statement that if you can't take volatility, you shouldn't be in this business anyway, because no matter how intelligent you are, you will end up doing something stupid at some point. <br /><br />Reminds me of J.P. Morgan's "sell down to the sleeping point", which will usually be good advice. <br /><br />The way I look at the CAPE, it's more of a tailwind/headwind thing than anything else. When it's low, the chances are overwhelmingly in your favor as an investor, because maybe even a scattershot approach will work. When it's high, then individual stockpicking will be ascendant, because for every 1 good, inexpensive stock there will be 9 others that are not. So I'd say the current environment (not even counting the macro issues) is a very tricky one. <br /><br />KK, with regards to margins, yeah, I've wondered about this too. The companies I've been looking at have tended to see increasing margins, but not to the extent that I see in that chart. I don't really understand it myself. Part of it has to be structural I think, with outsourcing and what not. Another contributor, the layoffs of 2008-2009 and companies not raising wages. Or maybe the much lower cost of capital. Not quite convinced that's enough though, because commodity prices have marched upward, which should have resulted in a more restrained move. Not really a macro guy though, so am probably missing something. Cogitatornoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-17041256193493741382012-05-06T19:18:31.904-04:002012-05-06T19:18:31.904-04:00Actually, now that I think of it, Greenblatt's...Actually, now that I think of it, Greenblatt's point was more that the mistake in 2008/2009 was not that people didn't pay attention to macro factors (he doesn't believe in market-timing) but that people owned too much stock. The market went down 50%, they freaked out and sold out. Others did just fine watching it go down and then coming right back up. So the moral of the story is not that we should refine our market-timing skills, but that we should calibrate our stock ownership so that we can tolerate the declines that will inevitably come (and won't be able to time our way out of). <br /><br />As professionals investors, holding on to some excess liquidity in pricey times is a good idea but that is a sort of not risk-free either; it comes with a cost (Vinick/Magellan). <br /><br />Again, great discussion. Not really arguing here, but clarifying.kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-50241935758235619302012-05-06T18:49:55.634-04:002012-05-06T18:49:55.634-04:00Good points. I don't disagree with what you s...Good points. I don't disagree with what you say, but I guess we see different things around us. I more often see people get out of stock and rush into gold, for example, because they think stocks are expensive. Having liquidity is a good thing for sure and being aware of what's going around is important, I suppose. But my point is more that it really doesn't work to buy and sell stocks according to what the total market valuation is. BRK made tons of money on KO, for example, and he did it by buying a good business at the right price and then holding on to it (even though he should've sold it in 1999). Most of his wealth was created by buying right and holding on, not moving in and out according to market valuation which is what people try to do from what I see. Holding excess cash in pricey times is fine when there aren't a lot of opportunities, but that's a little different than actually selling good businesses at good prices just because the market is expensive. <br /><br />What I try to tell people is if the marke is pricey, just take a good look at your holdings. If you like them, they are reasonably valued and don't have unsustainably high, bubbled up margins, then don't worry about the market. Don't sell that stock just because the S&P 500 is at 20x or whatever p/e. <br /><br />Even if someone owned the S&P 500 and the market p/e was 25x, I don't know that I would tell them to sell. <br /><br />As Buffett says, the market returned 10% in the past century but most people didn't earn that on their stocks. Why? Because nobody held on throughout. They bought and sold and ended up worse than the market. You could've prudently sold out in August of 1987, but how many of those folks got back in? <br /><br />So in order to earn long term equity returns, you can't really try to go in and out. Some people do it well, but the proof has been than most people don't do better... <br /><br />I think Buffett said something similar this year; he never thinks about macro factors when considering buying a business. If he understands it and likes the price, he buys. He and Munger never discuss macro issues. I think previously, he also said he doesn't worry about the stock market. He doesn't go, I like the business and the price it's offered at but the market is overvalued so let's wait until the market corrects and then buy. He said he has never done that. <br /><br />Greenblatt had a great essay on this issue too about how much stocks to own and on how many people are regretting not paying more attention to the macro factors. He disagrees with that notion. I tried to find that essay but it's not at the magic formula website. The gist of it was that people should own as much stock as they can bear going down 50% because markets will go down 50%. Greenblatt agrees with Buffett and thinks that if you can't bear a 50% decline, then you shouldn't own stocks in the first place. Greenblatt said to own just enough so that if the market goes down 50% it won't bother you. The problem is when people try to come up with ways to try to *avoid* those 50% declines in the markets (using various methods). That just won't work. <br /><br />Anyway, again, I see your point and we are not in disagreement. It is a fascinating topic for me. Great discussion.kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-72754249309977760762012-05-06T17:21:21.647-04:002012-05-06T17:21:21.647-04:00I agree with your point about what is most importa...I agree with your point about what is most important in each case as investors, but still believe we can say the market is overvalued. I didn't mean to imply today is the same as 2007. I agree that it isn't that bad now, but that the arguments you make above were as valid (or not as valid) then. Profit margins broadly were actually lower and the (at the time largest profit decline since the great depression) profit collapse of 2002 was also cited as distortive of the 10 year earnings portion of the calculation.<br /><br />As for your point on great value investors ignoring such measures I don't really think you are wrong I gues, but maybe it would be beter to say incomplete. I don't think Klarman can be said to have hated the market since 1983, he just always like some cash. He has hated it(and rightly so) since the mid 1990's. Greenblatt is a special case, but he tended to do more special situations as the market got more overvalued. The years from Stock Market Genius were not all that expensive. His behavior post 1995 has been a good bit different, but he is the one who is least afected by general overvaluation because of his concentration on special situations. <br /><br />On Buffett (and most of the value superinvestors) I will just disagree, though your point is still good, just incomplete. They routinely head to those areas where the market was undervalued and held cash when it was generally overvalued. Usually some part of the market is undervalued, allowing concentrated investors to go someplace. You are correct that the lack of opportunity rather than a G&D PE was the main determinant of their raising cash, but it coincided anyway. Buffett however has often raised cash specifically with the remark that the markets were generally overvalued. Famously he said as much when he closed the Buffett partnership and sent investors money back. Several other times he has pointed out the general unattractiveness of the market and the rationale for holding more cash than he would like. In fact, I believe in 2007 he specifically made the point he was carrying more cash than usual until the market got cheaper.<br /><br />"Despite three years of falling prices, which have significantly improved the attractiveness of common stocks, we still find very few that even mildly interest us. That dismal fact is testimony to the insanity of valuations reached during The Great Bubble. Unfortunately, the hangover may prove to be proportional to the binge." <br />-March 2003 Warren Buffett<br /><br />"I am out of step with present conditions. When the game is no longer played your way, it is only human to say the new approach is all wrong, bound to lead to trouble, and so on. On one point, however, I am clear. I will not abandon a previous approach whose logic I understand ( although I find it difficult to apply ) even though it may mean foregoing large, and apparently easy, profits to embrace an approach which I don't fully understand, have not practiced successfully, and which possibly could lead to substantial permanent loss of capital." <br />1969 letter to investors.<br /><br />Anyway, I think that while you are correct that value is value, regardless of the markets general level of overvaluation, it is not irrelevant to be aware of it. It can give you a signal that with patience the barrel's you are shooting in will have a lot more fish (and bigger values) in the future. Not everyone has a circle of competence large enough to find value in any market, and for those investors especially such things are important to monitor.<br /><br />Anyway, we are actually very close in how we see this issue, I am just sensitive to more casual investors being convinced an expensive market is cheap just because you or I can find areas that are reasonable. For them it can be really dangerous to listen.Lance Paddockhttp://www.riskandreturn.comnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-30067249791203551292012-05-06T13:37:35.213-04:002012-05-06T13:37:35.213-04:00p.s.,
and by the way, if you look at Greenblatt&...p.s., <br /><br />and by the way, if you look at Greenblatt's returns in his Stock Market Genius book, they are spectacular. And the key point there is that he didn't really achieve those returns by buying more stocks in 1982 (at cheap prices) and less in 1987 (when it was expensive). He did just as well in 1987,88 and 89 as he did in other periods. Buffett too, bought Solly preferreds right in front of black monday despite the stock market being bubbly expensive. The key is that they don't *not* do something due to those 'macro' concerns whether it's an economic outlook or a market p/e. Buffett's returns weren't made by lightening up in 1987, piling back in 1988, lightening up in 1993, buying back in 1994, selling out i 2000, buying back in in 2003, selling out i 2007 and getting back in in 2009 etc... That's not how he made his money and that's the most crucial point. Being aware of bubbles, though, is important, of course.kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-39854439862105361802012-05-06T13:29:31.296-04:002012-05-06T13:29:31.296-04:00Thanks for the post. You make good points. I do ...Thanks for the post. You make good points. I do know Klarman has hated the market for most of the time since 1983 or whever and always held tons of cash. BRK does so for regulatory purposes (insurance) and because cash keeps coming in faster than they could spend it. I don't know about Greeblatt, though. It's always nice to have liquid reserves, but I think the key point is that people seem to base that on opportunities available, not some bigger macro thing (except, again, Klarman). I disagree about 2007, though. I was looking very hard in 2007 and it seemed like, unlike 2000, EVERYTHING was overvalued. Even BRK. I couldn't find anything interesting to buy at all. So that was very different than 1999/2000. Anyway, thanks for the nice comment!kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-73849464649313585902012-05-06T13:21:41.730-04:002012-05-06T13:21:41.730-04:00KK,
I think you are right about the individual co...KK,<br /><br />I think you are right about the individual companies you mention. In fact, most of those pointing out the issue with profit margins have specifically mentioned that the kind of high quality companies you are mentioning have been in the reasonable range (Grantham, Hussman, Montier, etc.) Some are even cheap, if not spectacularly so. <br /><br />However, for that same reason I think you are wrong for the market as a whole. You may be right about the opportunity to buy cheaply is always there, but most investors (by definition) won't identify those values. They will suffer when the market collapses. Your arguments are similar to those I heard in 2007, which was an extraordinarily over valued market, and far more broadly so than in 2000 as you so rightly point out. So I would be careful of doubting issues in aggregate just because you are able to find values.<br /><br />I will also point out that great investors like Buffett, Klarman, Greenblatt and others are more top down than you suggest in looking at valuation. Why? Because if you are fully invested, even if in decent values, the optionality of cash when the market as a whole becomes undervalued is lost. Most great value investors hold more cash (or other alternative strategies and assets for while you wait) in overvalued markets and less in undervalued markets so they can take advantage of the declines. Thus identifying todays general levels of overvaluation is important for stock picking investors, not just macro traders. <br /><br />Margins for the cyclical's will come down, we just don't know when. Sure the huge declines in earnings in 2008-2009 are in the 10 year Graham and Dodd, and todays depressed financial earnings, but so are the far above average earnings and margins prior to then, especially in the financials. Those earnings were just as abnormal on the upside (especially for financials) as the downside. Those earnings were artificailly inflated for a number of reasons (and in fact were a large part of my thesis for shorting financials. My "margin of safety" on such a recommendation would be that no crisis was needed for financials profits to mean revert.) In addition, we have abnormally high earnings due to margins elevated by the aftermath of the crisis as well. The beauty of 10 year averages is that it smoothes out such issues. However, we can check whether the G&H PE is overly distorted pretty easily. Has real earnings growth over that 10 year period been artificially low? Is the total denominator in the G&H PE substantially lower than past history projected forward would have implied? Not that I can see. It looks to me as if profits have grown at an annualized rate as fast or faster than the past (due to margin expansion) despite slower than normal economic growth over the same period.<br /><br />By the way, I love your blog. Great stuff!Lance Paddockhttp://www.riskandreturn.comnoreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-36519440888086046362012-03-24T09:00:05.183-04:002012-03-24T09:00:05.183-04:00That's good. My point really was that if you ...That's good. My point really was that if you are looking at stuff that doesn't have excessiv and unsustainably high margins, it's not that important. Back in 2000 the market p/e was very high and you could have surveyed every stock to see what percentage of stocks were expensive, but if you owned cheap or reasonably valued stocks, it really didn't matter if the market had a 40x p/e or how many companies had 40+x p/e. I'm sure there are companies with high, unsustainable margins. I just happen not to come across many of those myself.kkhttps://www.blogger.com/profile/06299974418283948333noreply@blogger.comtag:blogger.com,1999:blog-5389144729834496735.post-58748805948283670942012-03-24T05:39:18.410-04:002012-03-24T05:39:18.410-04:00i like your articles in general, but here you are ...i like your articles in general, but here you are cutting some corners if you ask me.....<br /><br />i find this approach more realistic.....<br /><br />regards<br />rijk<br /><br /> http://valueandopportunity.com/2012/03/22/record-profit-margins-follow-up-german-companies/Anonymousnoreply@blogger.com