Picking A Fight With The “Value Investors”3 October, 2011, 12:25. Posted by Zarathustra
Tags: Market, Value Investment
Reading one of the most prominent bloggers and self-styled value investors here in Hong Kong is a rather sickening experience. Just like many other “value investors” here, they sound as though everything is cheap, especially after the recent turmoil (alright, that’s exaggerated to say that they think everything is cheap).
I do hope that the investment strategy that these “value investors” are using, namely buy-and-hold, and “be greedy when others are fearful”, and blah-blah-blah, would work. If buying a quality stock and put it in a drawer for 20 years would guarantee good return, this world would be a much better place. At the very least, one does not need to think, and that saves a lot of time and energy as far as I am concerned.
But we are in a rather different world. Business cycles for the past 30 years or so have been relatively benign for investors. Expansions have been long, and contractions have been short since the 1980s. But this is no longer the world I recognise. As I pointed out before, the US economy has been in recession for 35% of the time from 1854 to 1982, while it has been in recession for 5% of the time between 1982 and 2007. That age is behind us. Even in China, I am much less convinced than the consensus that China can manage the business cycle any better than the rest of the world. China has not experienced any negative growth since the liberalisation of its economy in 1970s. I think that age is also behind us.
The age of higher frequency of recessions means that stocks in the long-run will more likely disappoint, and investors will have to be more vigilant at the possible turning points in the macro environment and manage the risks accordingly. Unfortunately, these “value investors” are rather more happy about buying the dip and screaming that stocks are cheap. Instead of managing the risk exposure they already have in their existing portfolio, they think they need to buy more.
The idea of being “greedy when others are fearful” are also very problematic these days when you see too many people thinking that way. This sentence does not equal to "buying on dip”, and stocks falling big does not mean that everyone would automatically be fearful. In fact, if too many people hold the same belief that they should be “greedy when others are fearful”, and buy on dip as a result of the belief, there is really nobody who are genuinely fearful. I will need the market to knock away more of these people before starting to think about when to start to consider when it would be a good time to think about when to turn bullish.
Besides, while these value investors have memorised that quote from Warren Buffet that one should be “greedy when others are fearful”, they seem to have forgotten another rule attributed to him:
"Rule No.1 is never lose money. Rule No.2 is never forget rule number one.
Investors in the long-term long-only camp have experienced almost 50% annihilation of capital twice in the last decade, and we are probably headed towards yet another near-death experience if the economy is going into recession and the European and Chinese economies blow up. I see the risks here, so I am not willing to hold a stocks portfolio which allows my own capital to be destroyed by 50% in the name of long-term value investment.
In fact, if you allow your own capital to be destroyed by 50% every 3-5 years in the name of long-term value investment, that’s just silly: If you and I both started with $1 million before a 50% annihilation of capital, and if I got out before than while you did not, and if I got back into the market after the 50% annihilation and the market goes up 100%, you would be back to $1 million while I would have $2 million. If I could manage to do this for 4 times and you couldn’t, I would be 16 times richer than you by the end of that.
Alright, I know timing the market isn’t easy, and many people (myself included) would have the fear of missing a major rally. If stocks are going up big in the long-run, and if your investment horizon is very long (30+ years horizon), perhaps escaping from crash isn’t that important. But to borrow from a popular quote in a TV drama in Hong Kong, how many 10-year periods do you have in your life?