The Fearful/Greedy Investor IV

It's been more than four months off the March low. It's about time to see what we could have learned from this possible generation bottom (though some will just never learn).

1) Market Timing

Looking back, we can tell there's no expert when it comes to perfect timing (the bottom). So-called experts gave out pessimistic forecasts and set extremely low targets when the market was dropping, and vice versa. The weatherman probably could do better.

Charting is an art, not a pure science. - My two lines drawn near the end of last year could have been drawn a little better. Nevertheless, this (unscientific) estimate obviously did better than most top strategists.

"Investors are farmers, traders are hunters." - Many poor amateur hunters must have been lost in the jungle in the last few months...

2) Price and Value

"Price is what you pay. Value is what you get." - Warren Buffett

This is a short excerpt from my December post:

"Buy low, sell high" is an easy concept but many people find it hard to apply. This may help: Think buying stocks like buying clothes (say an Armani Exchange T-shirt):

• You don't care about price and will buy that T-shirt at original price. It's a cool newly designed T-shirt but is it worth $40? (Dow 14,000)
• It's two weeks before Christmas, there's a 30% promotion but it still costs $28. (Dow 9,000-10,000)
• 40% off! Sale is on for Christmas. The T-shirt is now reasonably priced at $24 but you know it can get cheaper. (Dow 8,000-9,000)
• It's New Year. Leftovers from Christmas are half off original price. The T-shirt is now $20! (Dow 7,000-7,500)
• What's your reaction if you somehow see it under $20 at an outlet store?

What should you do/have done if you consciously know that the fair value of a typical brand name T-shirt is around $20-25?

It looks like most investors are not smart shoppers... Emotion can only make one a bad investor.

3) Bulls, Bears, Chickens, Pigs, and the Farm

How does the farm look today?

• Bulls - They come out and do the work whether it's sun or rain. Their meals gathered during the lows make them a happy animal today.
• Bears - They had been enjoying nice meals up until the spring. They haven't totally given up yet though they're in fact on a countdown.
• Pigs - Some were formerly chickens until the smell of food made them hungry. Most of them didn't really know what they're doing but the bulls thank them for adding fuel to the fire.
• Chickens - They still had the nightmares in their minds. They won't come out anytime soon but the upcoming inflation era will probably starve them out.

The Scorecard

If you bought:

• In March when the market closed below 7,000:
  • +31.01%
• In November when the market dipped below 7,500:
  • +21.44%
• Every time the market reached 8,000:
  • +14.64%
• On Oct 9th, Nov 21st, Jan 20th, Feb 23rd, Mar 2nd, and June 16th when the fear index, VIX, was in the overbought territory:
  • +17.19%
• On Oct 13th after my first post of this series:
  • +8.32%
• On Oct 16th after Buffett's famous "Buy American. I Am." article on New York Times:
  • +6.72%
• With semi-monthly dollar-cost averaging:
  • +11.25%

• Read The Fearful/Greedy Investor Series

The Fearful/Greedy Investor III

If you bought:

• On Nov 21st when the market dipped below 7500:
  • +20.45%
• Every time the market reached 8000:
  • +12.92%
• On Oct 9th and Nov 21st when the fear index, VIX, was in the overbought territory:
  • +11.01%
• On Oct 13th after my first post of this series:
  • +6.76%
• On Oct 16th after Buffett's famous "Buy American. I Am." article on New York Times:
  • +5.33%
• With semi-monthly dollar-cost averaging:
  • +3.12%

• Read The Fearful/Greedy Investor Series

The Fearful/Greedy Investor II

For educational/entertainment purposes, two lines I drew back on October 11 remain valid on the latest chart:

In the last couple months, I've been reading a lot of junk predictions from so-called technical analysts. These were all the "bottom" numbers: 8,200, 7,900, 7,700, 7,500, 7,200, 6,800, 6,600, 6,000, 5,000, 4,000. Who's still timing the bottom?

Though VIX, the fear index, has dropped somewhat from its recent high, it remains at a very high level by historical standards. Short-term trading in this extremely volatile environment is no different from casino gambling. Surely, there's money to be made for those who can stick with the trading screen all day long (and with a lot of luck). Many will agree that the trading stress is just not worth it.

Fear and irrationality are gifts to long-term investors on an investment horizon with more than 5 years. Long-term investors buy stocks based on the strength of a business model (common sense) and business statements (income statement, balance sheet, and cash flow). There're homeworks to be done, and there's no shortcut if one wants to own stocks with confidence. With confidence, a major part of a long-term investor's success is patience.

I strongly believe that risk and return are correlated in the long run. I couldn't help when I heard that some elders (50s and up) were tremendously concerned about the market drop. That must be a mistake. Where did asset allocation go? They probably shouldn't have had a portfolio containing all stocks in the first place (or they should be well aware of the risk):

"A popular rule of thumb is to subtract your age from 100. The difference represents the percentage of stocks you should keep in your portfolio. For example, if you are age 50, 50 percent (100 minus 50) of your portfolio should consist of stock. However, you may want to modify the result after considering other factors, such as your age, risk tolerance, and financial goals."

"Buy low, sell high" is an easy concept but many people find it hard to apply. This may help: Think buying stocks like buying clothes (say an Armani Exchange T-shirt):

• You don't care about price and will buy that T-shirt at original price. It's a cool newly designed T-shirt but is it worth $40? (Dow 14,000)
• It's two weeks before Christmas, there's a 30% promotion but it still costs $28. (Dow 9,000-10,000)
• 40% off! Sale is on for Christmas. The T-shirt is now reasonably priced at $24 but you know it can get cheaper. (Dow 8,000-9,000)
• It's New Year. Leftovers from Christmas are half off original price. The T-shirt is now $20! (Dow 7,000-7,500)
• What's your reaction if you somehow see it under $20 at an outlet store?

What should you do/have done if you consciously know that the fair value of a typical brand name T-shirt is around $20-25?

• Read The Fearful/Greedy Investor Series

The Fearful/Greedy Investor

I was fearful when the market was red hot last year, now I'm greedy, very greedy.

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” - Warren Buffett.

Investing is a test of patience. Trading is a test of luck.

“I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.” - Warren Buffett.

Short-term stock movement is generally random.

“If a business does well, the stock eventually follows.” - Warren Buffett.

Don't time the market because nobody can time it perfectly.

“Only when the tide goes out do you discover who's been swimming naked.” - Warren Buffett.

You can't tell if a stock is a bargain unless you know its true value.

“Price is what you pay. Value is what you get.” - Warren Buffett.

• Read The Fearful/Greedy Investor Series