An Experiment In Bottom Fishing

Holding An Outsized Cash Position In Hopes Of Scooping The Market

Like many long term investors, I generally try to stay fully invested as a general rule.  Even at the best of times, cash typically drags down overall portfolio performance over the long term and most of us (myself included) are not great at guessing which way the market will leap next.  However, the past 5 years have presented investors with an amazingly large number of buying opportunities and I often found that being fully invested at such times meant that I could not fully take advantage of such opportunities.  I don't generally like keeping lazy cash around doing nothing, but I decided this spring to try hanging onto an abnormally high level of portfolio cash in expectation that a buying opportunity would materialize shortly.

Light At The End of the Tunnel, or Oncoming Freight Train?

A Value Investor's Dilemma When They Turn Out To Be Correct

Bottom fishing value investors (among whom I count myself) tend to have a thick skin, a willingness to ignore what everyone and their brother is saying, and the ability to hold their noses while clicking "buy."  In search of superior value propositions, we can look past uncertain business outlooks, messy financial statements, heavy debt burdens and even abrupt management changes.  We are accustomed to going it alone and relying solely upon our own judgement.  Perhaps that is why a persistent failing I see among value investors (myself included) is poor execution when the world comes around to the positive case for your investment.  After living through months or years of nothing but negativity about what you own, it is a bit unnerving to have investors change their view and start clamoring to buy your formerly hated investment.  To make matters even more confusing, if you have held the investment for any length of time you have probably seen brief upturns in valuation that have gone nowhere and quickly dissipated, so it is very tempting to bail out at the first sign of any positive sentiment.  Often value investors sell too early, leaving a lot of money on the table.  So how should a value investor gracefully and profitably exit their winning trade?

Predicting The Future

Forecasting Lowe’s Destiny Via Its Balance Sheet

One of the ways investors can make gains is to predict the future and trade upon their predictions.  Of course, nobody can really predict the future with any degree of certainty unless they have insider information (which is both highly unethical and illegal).  Since most of us wish to stay out of the pokey, we have to settle for putting together the pieces of the puzzle as best we can and inferring what might be likely to happen in the future.  In some cases, this is quite difficult.  For example, given all the uncertainty that seems to be out there, what is the likely change in consumer spending between 2011 and 2012?  Econometricians will build complicated models to attempt to forecast such numbers, but they typically have a wide margin of error and are all too frequently flat-out wrong.  This isn’t intended to be a knock on econometricians; rather it is an illustration of something that is extremely difficult to forecast with any degree of confidence.