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Dear readers,
its been a long hiatus for me and i apologise for that. These past few months has seen tumultuous times for global markets all around the world with the early ripples starting from the US and the subprime crisis. And honestly, i don't know or can tell how long or deep this probable recession is going to last and neither do the experts on cnbc no matter how opinionated they may seem. One thing is for sure, compared to 2 months ago, there are probably a lot more bargains around. Questions spinning in one's head include, how long, when is the trough or when should i buy all seem to try to do something impossible to achieve and that is to time the market. But dear investors, it is impossible to time the market. Let me give you an example of a company named washington post. Warren Buffet bought it when it was trading around a PER of 4X and it went lower after that. But Buffet took the opportunity to buy more. Great companies are available onsales right now and that has been evident with the dow at 11715 from a high of 14000. But still the down trend might have some way to go before it stabilises.
Now, reading some reports, it is said that an average span of recession from peak to trough actually last some 10 months while the longest span of recession can last 16months. If all is well, the down trending markets could end in 16 months. This is my interpretation of data compiled by the US Bureau of economic research. Correct me if i am wrong also but if it last beyond 16 months, it should be considered a depression. See below.
Now, if a recession lasts 16 months according to historical data from 1945, then any recession lasting more than 16 months would mean a depression. A depression would mean a period of low book values and declining activity within an economy. Are we heading towards a possible depression? Well, there could be a chance considering the deleveraging that is taking place in today's markets could depress values towards a level not seen in a long time. Well, i am not going to speculate at whether it is going to be a depression or not but what i am trying to do is to highlight the seriousness of today's falling markets with one advice. Let's face it. How many of us are Buffet like and have the ability to estimate accurately the range of intrinsic values of a company. Not many isn't it. Hence, let's all try to look at Ben Graham's approach, finding cash bargains and net-nets trading below two thirds of net current asset value cause we know that such companies thrived during the depression. After all, it is better to err on the side of caution. If you can't wait to get your hands on some of these stocks such as Wells Fargo, well do some bearing in mind that markets being irrationale as they are could beat the stocks down further. But if you do, do try to embark on a dollar cost averaging approach for cash is your number one weapon in today's markets. For more information or advise do email me regarding the nature of your portfolio and i will see how i can actually help.
Hence two takeways today:
1) Buy into tangible asset values
2) Perfom dollar cost averaging
Stay well. Stay Prudent and look out for great bargains.
Better and better,
Lucas
5 comments:
Dear Lucas,
You are right, we should not try to time the market and nobody does have the ability.
The application of Graham's approach is suitable in this situation. However, the approach needs to be modified a bit by recognising fewer stocks nowadays meet that strict criteria. We should also assess the approximate value of the business, most probably through discounted cash flow basis and some facts. Some companies are cheap and worth to buy, some companies are cheap for good reasons.
Welcome back and thank you for your sharing.
Dear Sechai,
You have to remember that Graham and Buffet approaches are different in a sense that might shock you. If you do read security analysis, it might surprise you that what Graham was trying to teach us was not how to value companies but how to identify statiscally cheap companies that generally do well as a portfolio. Now, you don't have to know how to value a company when you are a security analyst and your main job is to be able to find cheap companies according to Graham and he gave examples such as debt capacity bargains etc. You can still find such companies although they are limited. And the premise is that you can have great things happen to cheap companies because of information assymetry. With regards to modifying the approach, i am still undecided as to how best the approach should be modified. You can probably spare me a few pointers from there.
Buffet evolved and he is saying instead of just buying "cigar butts", let's buy a great companies with great managements at reasonable prices and hence the need to value and he felt the need to do so because he had such large sums of money to invest in and Ben Graham type of stocks were often too illiquid to invest in. He had constraints that probably most people, like me and some ordinary folk did'nt have. But so often, assessing intrinsic value is probably a very tough thing to do and Buffet does it so well that it is so hard to replicate. By all means, if you were confident of your ability to estimate intrinsic value through discounted cash flow, go ahead and do it but i really do not think that people in general are up to it. It takes years of research and building up your circle of competence to do so.
One quick and dirty way though is to look at it from a standpoint of a price to free cash flow metric. Never pay more than 7-8 x free cash flow excluding excess capital. But again, this is subjective and open to debate.
Best regards,
Lucas
Dear Lucas,
For your info, I am reading Security Analysis, the 1951 Edition, finishing soon. I understand that Buffett and Graham's approaches have significant differences.
Both DCF and Price to FCF are getting popular. I remembered Jeremy Siegel once said in his Stocks for the Long Run, (I only remember the idea)
' When everyone starts to qpply the same methods, then the previous merits of that methods will never reappear.'
So, we got to be careful if we are going to use this.
I understand that assessing intrinsic value requires years of efforts, but i am willing to do it.
With recent bear market, i can identify a few companies which fall under the NET-NET approach. (quite happy with that)
Thanks a lot.
Mind to give me your email ?
Se Chai
Hi Sechai, you can email me at king_luke35@yahoo.com or valueinvestorhaven@gmail.com valueinvestorhaven is actually chaired by Manpreet and me and it great to know that there are hard core folks like you in Singapore who believe in value investing. Very few of us out there pal.:) You are a rare breed.
Better and better,
Lucas
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