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I know what some readers may be thinking from the title – that we are still in the midst of a bear market as no pundit or prognosticator has come out boldly to proclaim that the bear market has ended and that we are in a bull market. But obviously, from the way valuations and market prices have risen since May 2009, there is no doubt that the worst has probably passed for the global economy, and I would like to take the opportunity to share some lessons I had learnt through this emotionally and psychologically trying period. Note that this is my first true bear market, and it happens to be one of the worst in the last 70 years. In fact, this period of time would now go down in history as “The Great Recession”, characterized by the collapse of large investment banks such as Bear Stearnes and Lehman Brothers and the near-failure of the global financial system. These events shook the core of the banking system and caused many to re-think their model of capitalism and the so-called “greed” that accumulated over the years, resulting in the last 18 months of riveting terror. Many fortunes were lost and portfolios decimated as the bear market swept across the globe like a financial tsunami. From the ashes of the destruction, I have picked up more valuable nuggets of wisdom than I could possibly salvage from books, and I now pen them down here. They are in no particular order of merit.
1) Valuations can never be too low – When evaluating companies for purchase, one would usually look at valuation metrics as one of the criteria for determining if a stock was considered “cheap” or “expensive”. This is based on historical levels of valuation and one can also benchmark this against the broader index to obtain some level of comparison, albeit a rough one. What the bear market has taught me is that valuations can be pushed down to ridiculously low levels, so much so that it almost becomes ludicrous for companies to trade at such levels. During the Great Depression, Benjamin Graham discovered that many companies were better off dead than alive, for the share price was just a fraction of their cash value (or net asset value), creating a unique situation where there was plenty of margin of safety. Similarly, during the 2008 Bear Market, the manic mood swings of Mr. Market created a whole lot of bargains; but the discerning investor had to separate the wheat from the chaff and find out which companies were cheap for a good reason; and which were cheap by virtue of a wrongful appraisal by Mr. Market. The concept of margin of safety may appear irrelevant in the short-term as prices keep dipping to new lows; but this is a necessary by-product of loss aversion, over-reaction bias and forced selling/margin calls, and may not necessarily reflect the true state of affairs of the company.
Though valuations can never be too low, they should be low enough for an investor to take comfort in his choice of selection of security which he feels will be able to generate a decent long-term return for him. Read more...[caption id="attachment_2568" align="alignright" width="150" caption="Photo by John Althouse Cohen"][/caption]
I know what some readers may be thinking from the title – that we are still in the midst of a bear market as no pundit or prognosticator has come out boldly to proclaim that the bear market has ended and that we are in a bull market. But obviously, from the way valuations and market prices have risen since May 2009, there is no doubt that the worst has probably passed for the global economy, and I would like to take the opportunity to share some lessons I had learnt through this emotionally and psychologically trying period. Note that this is my first true bear market, and it happens to be one of the worst in the last 70 years. In fact, this period of time would now go down in history as “The Great Recession”, characterized by the collapse of large investment banks such as Bear Stearnes and Lehman Brothers and the near-failure of the global financial system. These events shook the core of the banking system and caused many to re-think their model of capitalism and the so-called “greed” that accumulated over the years, resulting in the last 18 months of riveting terror. Many fortunes were lost and portfolios decimated as the bear market swept across the globe like a financial tsunami. From the ashes of the destruction, I have picked up more valuable nuggets of wisdom than I could possibly salvage from books, and I now pen them down here. They are in no particular order of merit.
1) Valuations can never be too low – When evaluating companies for purchase, one would usually look at valuation metrics as one of the criteria for determining if a stock was considered “cheap” or “expensive”. This is based on historical levels of valuation and one can also benchmark this against the broader index to obtain some level of comparison, albeit a rough one. What the bear market has taught me is that valuations can be pushed down to ridiculously low levels, so much so that it almost becomes ludicrous for companies to trade at such levels. During the Great Depression, Benjamin Graham discovered that many companies were better off dead than alive, for the share price was just a fraction of their cash value (or net asset value), creating a unique situation where there was plenty of margin of safety. Similarly, during the 2008 Bear Market, the manic mood swings of Mr. Market created a whole lot of bargains; but the discerning investor had to separate the wheat from the chaff and find out which companies were cheap for a good reason; and which were cheap by virtue of a wrongful appraisal by Mr. Market. The concept of margin of safety may appear irrelevant in the short-term as prices keep dipping to new lows; but this is a necessary by-product of loss aversion, over-reaction bias and forced selling/margin calls, and may not necessarily reflect the true state of affairs of the company.
Though valuations can never be too low, they should be low enough for an investor to take comfort in his choice of selection of security which he feels will be able to generate a decent long-term return for him. Read more...
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I know what some readers may be thinking from the title – that we are still in the midst of a bear market as no pundit or prognosticator has come out boldly to proclaim that the bear market has ended and that we are in a bull market. But obviously, from the way valuations and market prices have risen since May 2009, there is no doubt that the worst has probably passed for the global economy, and I would like to take the opportunity to share some lessons I had learnt through this emotionally and psychologically trying period. Note that this is my first true bear market, and it happens to be one of the worst in the last 70 years. In fact, this period of time would now go down in history as “The Great Recession”, characterized by the collapse of large investment banks such as Bear Stearnes and Lehman Brothers and the near-failure of the global financial system. These events shook the core of the banking system and caused many to re-think their model of capitalism and the so-called “greed” that accumulated over the years, resulting in the last 18 months of riveting terror. Many fortunes were lost and portfolios decimated as the bear market swept across the globe like a financial tsunami. From the ashes of the destruction, I have picked up more valuable nuggets of wisdom than I could possibly salvage from books, and I now pen them down here. They are in no particular order of merit.
1) Valuations can never be too low – When evaluating companies for purchase, one would usually look at valuation metrics as one of the criteria for determining if a stock was considered “cheap” or “expensive”. This is based on historical levels of valuation and one can also benchmark this against the broader index to obtain some level of comparison, albeit a rough one. What the bear market has taught me is that valuations can be pushed down to ridiculously low levels, so much so that it almost becomes ludicrous for companies to trade at such levels. During the Great Depression, Benjamin Graham discovered that many companies were better off dead than alive, for the share price was just a fraction of their cash value (or net asset value), creating a unique situation where there was plenty of margin of safety. Similarly, during the 2008 Bear Market, the manic mood swings of Mr. Market created a whole lot of bargains; but the discerning investor had to separate the wheat from the chaff and find out which companies were cheap for a good reason; and which were cheap by virtue of a wrongful appraisal by Mr. Market. The concept of margin of safety may appear irrelevant in the short-term as prices keep dipping to new lows; but this is a necessary by-product of loss aversion, over-reaction bias and forced selling/margin calls, and may not necessarily reflect the true state of affairs of the company.
Though valuations can never be too low, they should be low enough for an investor to take comfort in his choice of selection of security which he feels will be able to generate a decent long-term return for him. Read more...
