Josh has an excellent post up, titled Don’t Hate the Asset, Hate the Price, that makes several important points. I want to reiterate and expand on them here. Some of these are lynchpins of an investing philosophy I have been espousing for many years.

Its a broad discussion on price and value, and I think there are numerous takeaways:

1) Price Has Memory: Every retail broker has heard a client lament “Dear Lord, let me please just get back to breakeven.” That is a classic example of price memory.

More simply stated, the prices of traded assets behave as if some specific past prices are more significant than others. What that actually means is that traders recall the prices they paid, and that affects subsequent trading action. This is reflected in the following definition: “Technical analysis is the study of supply and demand and it centers around how people behave at specific prices, it is not witchcraft or voodoo and much of it is intuitive.”

I think JB gets that just right — its not that support or resistance lines are so magical, its that they reflect a price level that has some emotional significance for the trader/investor. Resistance is that aforementioned “breakeven” point;” Support is more of a “Every time I bought at this level, I made money” — so why not try again?

2) Everything can be either a good buy or a good sell at some point: This is a deceptively simple concept, but an important one. The price of a transaction determines whether or not its a successful trade — not the CEO or the underlying business model or some new widget. As I mentioned in my universal entropy theorem of investing, which effectively concludes that everything from Intel to the 10 year bond to Apple to Gold — eventually goes to shit.

Years ago, I used Microsoft as an example of how price matters. At $30, it was a money loser if you paid $40, and a winner if you paid $20 — all of which had been actual prices over recent year. (Its currently ~$36) Same business model and management, different price points.

3) Be Agnostic on everything:  Hence, objectivity should greet any potential investment.  Josh points out that Airline stocks in 2013 (up 96%) and Junior Gold Miners in 2014 (up ~15% ytd) were both despised. If you tried to sell anyone on Apple (AAPL) in 2001 after the first iPod came out — $7.50 a share with $6.50 in cash you were toldthe company was going out of business and you should get your head checked because you are obviously crazy.

Whenever you hear the phrase Ugh! in response to an investing discussion, there is a very good chance you have discovered a hated asset class. In the past, I have described this as “Buy What You Hate.

4) No asset or strategy is so good that you should invest irrespective of the price paid.”

The quote above is from James Montier of GMO. It is the inverse corollary to Buy What You Hate” — just because you love something, does not mean its a buy. Indeed, be especially wary of what asset you may love.

In investing, asset classes mean revert over time, but individual names are subject to very different forces. Its important to be aware of this.



No Such Thing As Toxic Assets . . . (October 9th, 2009)

When you invest, focus on price (May 04 2010)

First and Always, Price (July 7th, 2011)

No Such Thing As Toxic Assets . . . Only Toxic Prices (February 16th, 2012)

Don’t Hate the Asset, Hate the Price!
Joshua M Brown
The Reformed Broker, January 18th, 2014

Category: Investing, Philosophy, Really, really bad calls, Valuation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

5 Responses to “Assets versus Prices”

  1. rd says:

    This post is related to the “sunk cost fallacy” that is, I think, one of the most under-rated issues in business as well as in investing. It is usually only the most disciplined, experienced managers that are able to focus on the “now” of a challenge instead of the past. It is also one of the greatest enemies of innovation as much innovation comes from understanding failures and walking away from the costs associated with the failed approach into a totally new way of looking at it. People focused on covering their butts are looking behind them instead of forward and so they miss the opportunity.

  2. maxueli says:

    I used to deal in distressed (aka ‘bad’) debt for GE Capital…. our watchword, very consistent with this lovely post, was ‘there are no bad assets; there are only mispriced assets’….

    • Thurston says:

      As to point one, I recall seeing Marc Fisher (I think) on FM and him saying that the “definition of an investor is a trader waiting for his position to break even.”

  3. [...] Four takeaways on asset class prices.  (Big Picture) [...]