Posts filed under “Valuation”
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
click for larger graphic Source: BCA Research There seems to be an increasing concern that stocks have become wildly overvalued, especially in light of rising interest rates. However, somewhat overvalued U.S. equity prices can continue to rise if price/earning multiples keep expanding. Continues here
A few weeks ago, Yale Professor Robert Shiller won the Nobel prize for his work on irrationality and inefficiency of markets. Since then, we have been treated to a plethora of stories on some of his other work — especially so-called CAPE, Shiller’s measure of long term valuation. The general consensus seems to be that…Read More
click for ginormous charts Source: JP Morgan JP Morgan observes: “Shiller P/E shows the market to be overvalued, but not as extreme if you use the NIPA data.” I’ve never used the NIPA data, so I have no real opinion on it. The two charts look directionally similar, but different in terms of magnitude….Read More
Shiller’s cyclically adjusted price-earnings ratio click for ginormous chart Source: Bloomberg Robert J. Shiller, a co-winner of this year’s Nobel Prize in Economic Sciences says US stocks are expensive. They are the most expensive relative to earnings they have been in more than five years — since the lows follwoing the great collapse…Read More
Whipsaw David R. Kotok Cumberland Advisors, October 13, 2013 A whipsaw is a “long, narrowing, tapering ripsaw, usually set in a frame and worked by one or two persons.” Webster’s Unabridged Dictionary, second edition. What a play on words. “Long,” as in, we are now passing two weeks of shutdown. Different scenarios take…Read More
Shiller P/E Bottoms Coincide with Major Lows, Downtrend Breaks Precede Rallies Click for ginormous chart Source: Merrill Lynch Nice chart from Stephen Suttmeier & Co looking at how the Shiller P/E ratio compares to regular P/E at major lows, downtrend breaks, and before rallies: The good news is that secular trading ranges lead to…Read More
Click to enlarge Shorter Dave Wilson: Emerging markets have stunk the joint up. The longer version looks at some of the new ETFs that seek to shore up performance of emerging-market stocks by dropping the BRIC part of EM: -The four-country BRIC indicator has slipped 15 percent, with Brazilian stocks leading the decline. -Beyond…Read More