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Thinking Differently - Value Investors & Rising Markets

November 11, 2013 | About:
The Science of Hitting

The Science of Hitting

249 followers
A quick search on Bing News for “market overvalued” will show a few dozen articles on the first two to three pages (all written in the past two weeks or so) that agree with that conclusion; the consensus has shifted, and the majority now seems to agree that the market is fully valued or overvalued.The interesting thing to watch is how people react to that conclusion.

Let’s start with the viewpoint of the value investor (or how it is so often painted). Value investors are generally focused on one thing: bottoms-up stock selection. A fairly or overvalued stock market isn’t an issue except to the extent that it diminishes the stream of potential investments. Naturally, that’s a likely outcome of a rising market – especially among the large cap, blue chip stocks that are the primary focus of sizable market participants.

Value investors, if true to their craft, only have one choice when they can’t find anything worth buying: wait for better days. Wally Weitz of the $1.1 billion Weitz Value Fund is a great example of such an investor - in a recent Bloomberg Businessweek article, Mr. Weitz noted that a full 29% of his funds’ assets are currently allocated to cash and Treasury bills:

“It’s more fun to be finding great new ideas - but we take what the market gives us, and right now it is not giving us anything.”

Of course, this brings up the average market participants greatest fear: what happens if the markets keep moving higher? This question alone is what separates the value investors from the herd. As Mr. Weitz noted, there isn’t much to be done if the market isn’t giving you any opportunities; if it continues to move against you – and those opportunities become even more scarce – there’s now even less reason to act.

The individual investor simply cannot accept that line of logic; they don’t view equity price movements as a continuing process, one that swings from depression to euphoria and back again, all without signaling when the next change will occur. They see higher stock prices as one thing, and one thing only – missed opportunity; with the benefit of hindsight, they judge their prior action (or lack of one in the case of buying) in the context of a single week or day’s price change – as if they could’ve (or have reason to believe they should’ve) known what would happen before hand. In many cases, they convince themselves that they DID know – and should have trusted their instincts.

This perverse reasoning disregards the fact that stock prices represent partial ownership in a business, with that value dependent upon the future cash that business will bring to its owners. They have no chance of being around a year from now, and don’t care about what the business will earn over the coming decade – they’re more focused on the stock’s trading pattern over the previous 50 days. It’s hard to overstate how much this change in perspective will affect the way you look at stock price movements.

This individual cannot take a 5% price movement higher or lower in stride; the most recent change in equity prices is telling them something important, and will guide their future actions. Let’s return back to our value investor: imagine you’ve found a security where you believe the current valuation implies a forward rate of return of 15% per annum.

Our hypothetical stock is trading at $100 per share – meaning you expect it to reach more than $400 per share ten years down the road ($404.56 to be exact). Now, what happens if the price suddenly jumps 5%, as outlined above? Well, from a starting point of $105 per share, a move to $404.56 in ten years’ time results in a compounded rate of return of 14.44%. Even a move 20% higher – to a starting price of $120 per share – would result in a CAGR just shy of 13% per annum.

Think about that in the context of this year; to date, the S&P 500 has moved higher by a bit over 20%. A move that many are characterizing as quite sizable would only cause our implied CAGR to fall by about two percentage points per annum; and while that certainly is a meaningful difference (especially over time), the impact of that 20% move isn’t as life-changing as recent market commentary might have you believe.

Of course, this could become a slippery slope – and you must set a level where you’ll stop sliding; if you require an ex-ante return of 15% per annum, then this move has just priced you out of the market. With what we’ve experienced in the past few years (in my personal experience, with names like JNJ, PEP, and others), valuations that were implying solid double digit rates of return now appear closer to high single digits per annum – and while that continues to blow away the expected returns on the long bond, it’s not too enticing on an absolute basis.

All that is a lot of rambling to bring me back to the main point: as a value investor, there’s nothing to do but to buy undervalued securities; when you can’t find undervalued securities, then you have no real option but to suck your thumbs. Other market participants cannot stand to underperform; they don’t view rising equity prices as temporary and expanding excess that will one day revert to reality – they see it as missed opportunity.

They are under the illusion that markets will see what they see, and react as such now; reality is much different. Many calling for fully or overvalued markets seem to believe the slowdown or reversal must happen quickly (this can’t go on); while I’d love to see that happen, I understand that the market doesn’t care what I think (you don’t have to look further than the late 1990’s to see that markets can get far more optimistic for a long, long time). The near future is unknown – trying to guess which is more likely (continued gains, a sideways market, or maybe a present day “Black Monday”) and when it will happen is a fool’s errand; accepting the movements and acting when they give you a chance to intelligently do so is a much more promising route.

About the author:

The Science of Hitting
I'm a value investor, with a focus on patience; I look to buy great companies that are suffering from short term issues, and hope to load up when these opportunities present themselves. As this would suggest, I run a fairly concentrated portfolio by most standards, usually with 8-10 names; from the perspective of a businessman rather than a market participant / stock trader, I believe this is more than sufficient diversification.

I hope to own a collection of great businesses; to ever sell one, I would demand a substantial premium to the average market valuation due to what I believe are the understated benefits to the long term investor of superior fundamentals and time on intrinsic value. I don't have a target when I purchase a stock; my goal is to replicate the underlying returns of the business in question - which if I've done my job properly, should be very attractive over many years.

Rating: 4.5/5 (24 votes)

Comments

AlbertaSunwapta
AlbertaSunwapta - 1 year ago
Great discussion. I have something for you to ponder for a second or two. (Note, I'd like to leave bonds, PE, alts, out of this simplified abstraction or speculation if possible.)

So, on sitting on the sidelines, I've never been satisfied with my approach. I choose cash (or sometimes bonds), always have, and have sat for years with uncomfortable levels of cash if not raising cash levels (eg. 2004-2008). A year ago I started moving to cash and by May I'd gone substantially to cash. Lately I've bought a couple positions but still sit mostly in cash and short term fixed income instruments. If instead of cash I'd bought a market equity index I'd be substantially ahead. For decades I've wondered whether my shifts to cash were a sensible strategy. In fact years ago I asked on this board why Buffett would go to cash and not a market index, but didn't get much in the way of considered opinions.

So, correct me where I'm wrong.

The future is uncertain so all attempts at valuation are almost certainly flawed. (Hence one of the reasons behind the need for a margin of safety.)

All value investors have, or like to think they have, a circle of competency. Many investors regularly stray from any circle of competency (leakage) as they try to expand that circle.

Correctly judging whether a stock or sector is over or under valued requires competence in valuing that company or sector (or cross-sector aspect of business).

Value investors that can't find undervalued stocks are necessarily looking only at stocks within their circle of competence. Thus individual investors can't say with much certainty whether the market itself is under, over or fairly valued only that they can't find value in their circle. The fact that they also stray means that even composite measures of value investor positions can't truly determine whether such value investors in aggregate see the market itself as under, over or fairly valued.

When value investors can't find value they often sit in cash so they gain optionality, etc. but they are quite likely to incur the opportunity cost mentioned above.

As a result of choosing cash over market indexes, value investors are essentially (overtly or covertly) market timing as well as making a forecast that companies within their circle of competence will within a reasonable time return to value.

That said, I look to other sources and metrics to assess the condition of the overall equity market(s) Plus as those metrics align, I look for companies that will behave opportunistically in a declining market. (This hasn't worked out well, as they freeze up too.)

Now as a long term investor wouldn't it make more sense to me to move between individual 'value investments' and market indexes - rather than cash?

:-)
The Science of Hitting
The Science of Hitting premium member - 1 year ago
Alberta,

Well, a lot to chew on there, but I'll add my two cents:

"A year ago I started moving to cash and by May I'd gone substantially to cash."

I tried to address this a bit in the article with the discussion on forward rates of return; unless all of the stocks you own ran up substantially more than the market as a whole, I don't see how that can be the case. If you were holding something with the requirement of a low-mid teens annualized returns, even the 20% plus move year to date has only changed that by a few percentage points per annum (on a ten year measure). I don't think going 100% to cash when you are looking at opportunities at 8-10% per annum makes much sense (especially with the current rates); if you could only find things priced to conservatively deliver low-mid single digits per annum then I think you could make a strong case for a significant cash position - but even then, I wouldn't go anywhere near 100% (that's just me). This is the biggest difference between what you're advocating / have done and what I think is appropriate; I'm much more for holding the great businesses even as they move past where I would consider buying more, and letting new funds / dividend payments build up in cash / short term fixed income. I would only take that so far; the fact that I haven't sold any PEP, JNJ, etc, so far talks to how much further I would be comfortable going.

"
[color=#333333; font-size: 12px; line-height: 18px]The future is uncertain so all attempts at valuation are almost certainly flawed. (Hence one of the reasons behind the need for a margin of safety)."

Honestly, I'm not too sure what you mean by that; there's certainly some middle ground between completely unknown and 100% certainty, no - particularly for individual companies? Look at WMT's operating margins over the past decade-plus; don't you think you could make a decent estimate of where they'll be five years, for at least the domestic operations? With a reasonable estimate for international ops, payout / reinvestment rates, etc, you can put together a rough idea of the future with a pretty high level of confidence; isn't that the definition of valuation? What about that seems flawed? From there comes the hard part - waiting.

"[/color] [color=#333333; font-size: 12px; line-height: 18px]As a result of choosing cash over market indexes, value investors are essentially (overtly or covertly) market timing as well as making a forecast that companies within their circle of competence will within a reasonable time return to value."

To some extent I agree with that statement; to the extent that the securities you look at move similar to the broader indices (as is likely the case with large cap blue chips), this will be the case even if you solely focus on bottoms-up analysis. However, that is different than moving to a top-down approach - i.e. refusing to buy the opportunities you do find because of current levels.

As an example, I have two stocks that I'm watching that I would start buying if they fell ~10%, and would load up in a material fashion if declines continued further (one can only hope!). I could care less about the broader market levels if that were to happen; but there's a reason why only 2 meet that requirement, compared to the dozen or so back in 2011 - and it has been the rise in the broader market.

Hopefully that answers some of the questions; maybe others will have something to add.

Thanks for the comment![/color]
vgm
Vgm - 1 year ago
AS -- a few reflections on your post (thanks for the honesty):

"A year ago I started moving to cash and by May I'd gone substantially to cash."

If this was not motivated by fair or overvaluation of your stocks, then you allowed Mr Market (or market prognosticators) to be your master and not your servant. There were certainly undervalued stocks a year ago, and even now in my opinion. Maybe your circle of competence is tight, which is admirable but will be frustrating at times.

"The future is uncertain so all attempts at valuation are almost certainly flawed."

Valuations can never be precise, but an estimate of intrinsic value is a perfectly good way to judge a stock. A range of values is common. Buffett tells us that he won't buy anything unless he has a good (note, not precise!) idea of how it will look in 10 years.

"If instead of cash I'd bought a market equity index I'd be substantially ahead."

Yes, but your reason for having cash is presumably to opportunistically buy when value appears. Opportunity can be fleeting and normally unexpected.

"As a result of choosing cash over market indexes, value investors are essentially (overtly or covertly) market timing"

Arguably the opposite is true. Buying an index as a short term place for cash would appear to me to be market timing. A value investor in cash awaiting undervalued stocks knows that sooner or later something(s) will appear. He/she is not timing anything, just patiently waiting with no idea of when.

"I look for companies that will behave opportunistically in a declining market. (This hasn't worked out well, as they freeze up too.)"

I think this is a plausible strategy, assuming the stocks have been purchased with a margin of safety. Good companies will not avoid a drop when the whole market is declining, but they will be more likely to be resistant/opportunistic and will spring back when the market turns back up - think Fairfax or Brookfield Asset or Wells Fargo, in 2009, for instance.

Just some thoughts - too many probably!
20punches
20punches - 1 year ago
Great discussion first of all. Very thought provoking.

Plus as those metrics align, I look for companies that will behave opportunistically in a declining market. (This hasn't worked out well, as they freeze up too.)

In a logical sense, the only assets that will certainly behave opportunistically in a declining market are cash and inverse etfs. However, what we can learn from Buffett is that special situation opportunities may do decently in a down market such as merger arbitrage and spin offs.

"When value investors can't find value they often sit in cash so they gain optionality, etc. but they are quite likely to incur the opportunity cost mentioned above."

Very often the defining characteristic of a value investor is the propensity to look at downside first before assessing the upside. It is not fun to hold cash which generates 0% nominal return when the market is rising. However, the higher the market and the individual stocks that make up the market, the higher the risk. Sure you can forgo a 20% upside by sitting with cash but if your investment is down 20%, you will need it to be back up 25% for you to make up your losses. If it's down 50%, you will need it to be up 100% to recover your loss. Therefore, holding cash when values are hard to find is to both provide you with the optionality and to protect you from suffering from losses that require a higher percentage recovery to break even. That's how I see it.


As a result of choosing cash over market indexes, value investors are essentially (overtly or covertly) market timing as well as making a forecast that companies within their circle of competence will within a reasonable time return to value.

Now as a long term investor wouldn't it make more sense to me to move between individual 'value investments' and market indexes - rather than cash?"

In my opinion, the difference between choosing cash and choosing market indexes is that choosing cash when things are expensive is more like a natural defensive reaction whereas choosing a market index is in a roaring market is more like a proactive risk seeking offensive play. When you buy market indexes, you are essentially saying you have a pretty good guess what the future return is like. When you hold cash, you admit that you have no idea what the future return is going to be. If you find undervalued opportunities in any market, you will buy it no matter what the market does. If you can't find undervalued opportunities, which is the likely the case in a heated market, you have no option but to sell and hold cash.Yes, value investors are bottom up but that doesn't mean we should completely ignore the macro environment. Instead of timing the market, we take the temperature of the market and adjust the portfolio strategy accordingly. Again, holding cash protect you from incurring substantial losses in a down market and holding long position in market indexes will make it harder for you to make up for for the losses incurred. Granted, maybe during most of the time holding cash will make us look stupid but the benefit of holding cash during crisis period will eventually outweigh the opportunity cost we lose in because we are disciplined to hold cash.

AlbertaSunwapta
AlbertaSunwapta - 1 year ago
^ I don't see it as letting Mr. Market being my master and not my servant. Instead it's looking at market metrics and changing my capital allocations. Note that I was a heavy buyer throughout the depths of the crisis and again in the fall of 2011's crisis. Here's Jeremy Gratham discussing value investing:



"When you buy a stock, because it has surplus assets or a good yield or a great safety margin, you are really making a bet on regression to the mean. We are really counting on the fact that current unpopularity will fade, that the current problems in the industry will dissipate, and that the fortunes of war will move back to normal. Well, as a provable, statistical fact, industries are more dependably mean-reverting than stocks, for individual stocks can on rare occasion, permanently change their stripes à la Apple. (Or is that à l’Apple?) Sectors, like small caps, are more provably mean-reverting than industries. The aggregate stock market of a country is more provably mean-reverting when mispriced than sectors. And great asset classes are provably more mean-reverting than a single country. Asset classes are the most predictable of all:..."

"So it’s simply illogical to give up the really high probabilities involved at the asset class level. All the data errors that frighten us all at the individual stock level are washed away at these great aggregations. It’s simply more reliable, higher-quality data." - source: Playing with Fire Q1, 2010, Part 1: “Friends and Romans, I come to tease Graham and Dodd, not to praise them.” (On the potential disadvantages of Graham and Dodd-type investing.)

Jeremy Grantham
vgm
Vgm - 1 year ago
"Instead it's looking at market metrics and changing my capital allocations."

It's close to impossible for the average investor to get a meaningful handle on such metrics and come up with a correct non-consensus view (second level thinking according to Howard Marks). And I think you proved it. There are simply too many factors and moving parts. It's a fool's errand. On occasion there's an obvious bubble, like 2000, however - but we had value investors galore telling us too.

There were any number of credible value investors who were finding value a year ago - but of course there were also the usual market forecasters who continued to predict gloom and doom, and who continued to be wrong (no surprise there). Buffett and Marks telling us recently that the markets are now about fairly valued, but not stretched, is a bona fide expert view in my humble opinion, and puts the past five years (and the doomsayers and their colored charts) in perspective.

Understanding that the markets are fairly valued now is a reason to be cautious, and revisit our valuations, making sure we still have a margin of safety - but per se it's no reason to move largely to cash.
buynhold
Buynhold - 1 year ago
vgm,

>> It's close to impossible for the average investor to get a meaningful handle on such metrics

It's no harder than picking individual stocks to invest in. Look at http://www.gurufocus.com/stock-market-valuations.php

If you follow Buffett's favorite measure, Market Cap/GDP, the US is about to enter significantly overvalued territory (ratio > 115%, currently 112.5%). GMO (Grantham et al)'s 7-year asset class forecasts paint a similar picture. Both of these have historically been accurate predictors of forward market returns. Don't confuse absolute valuation with relative. Buffett and Marks saying markets are fairly valued now is relative to current cash and bond yields. Marks explicitly said so.

IMO, comparing today with 2000 is dangerous. In 2000, there were a lot of cheap stocks available in the US. Not so today. To me, that makes today's market more dangerous, since virtually all asset classes have been bid up significantly since 2009 (and not all of this is based on fundamentals - part of this is definitely due to the easy monetary policy which can't last forever).

How do you act based on this info? There are many ways, and some of it is a matter of personal preference. There is sound logic behind Alberta moving largely to cash: if the market is going to return only 3-4% per year over the next 7-10 years, it is highly likely that you will get a chance to invest at a much higher yield than today's in the future. He is selling, say, 90 cent dollars and waiting for 50 cent dollars to be served to him. Never underestimate the power of mean reversion.

vgm
Vgm - 1 year ago
Buynhold,

"It's no harder than picking individual stocks to invest in."

It's naive in the extreme to suggest everything is so easy in investing. If it were, we'd all be rich and happy, moving in and out of the market seamlessly. And Grantham would be Buffett. Your statement reminds me of Munger's warning: "None of this is easy. And anyone who thinks it's easy is stupid." And as Howard Marks says: "Not only do I not want to simplify investing - I want to show how not simple it is. There are many layers."

As I pointed out, and you repeated, yes we should be cautious today since the market has come up a long way. And, sorry again to repeat, but you seem to miss the point: we should be comfortable with the valuations of stocks we choose to hold and the margin of safety they currently represent. And, yes, there will be bargains down the road for the patient - and I hope to be a buyer too with cash from fully valued holdings.

No one will be satisfied with 3-4%. That's confusing markets with stocks. An exceptional value investor will always find ways to outperform. Mean reversion should be kept in perspective. Have the stocks of great companies mean-reverted? No of course not.

I agree there is personal preference. It's a multifactorial assessment, and again please remember it's not at all easy. To go totally to cash on the basis of unstated concerns seems extreme. But minimally we need to have the courage of our convictions, and not allow Mr Market to get the better of us by our lack of resolve.

I doubt we'll see Buffett, Weschler, Combs, Berkowitz, Nygren, Cooperman, Simpson, Greenberg, Pabrai and a host of other eminent value investors going all to cash nor planning for 3-4% returns.

Thanks for the exchange. Good luck to us all.
AlbertaSunwapta
AlbertaSunwapta - 1 year ago
I should have added that the majority of my sales last fall were index funds. In mid May I exited more index funds as well as sold off individual share positions. I still hold some significant equity positions. Some are quite old positions (20 years), to which I've added more shares in the past 6 months. Some of the shares I sold were acquired in March and April of 2009 so I've not been affected by doomsayers in the interim.

You'll note that many gurus on this site have also exited positions or had positions mature, without reallocation to new value positions. Their cash positions are rising to high, if not record levels.

My view is that the further we progress in time without having either a recession or a major market retreat, the more likely it gets that one will occur in the near term. Pretty simple logic. Using market metrics to judge index holdings seems reasonable. That said, I've missed some of the gains from the 2013 winter/spring run up by playing it safe. My view is that fairly valued markets don't necessarily have to move into overvalued markets. They may fluctuate between undervalued and fairly valued. For example much of post WWII America until the 1970s. Today though, it seems that there are a number of potential catalysts that could trigger a market drop but fewer except the "confidence game" played by a continuation of QE-forever that could drive it substantially higher. (How much more can capital structures and profit margins benefit?)

Also, holding some stocks with less certain long term prospects (i.e technology such as Google, Microsoft, Qualcomm, etc.) into a recession of indeterminate length means that obsolescence might begin to occur in generally undervalued market conditions. To me exiting such positions prior to a downturn in prices makes more sense than holding with a faith based plan to buy more in any downturn. However companies like KO, BRK, etc. where the post recession company is likely to be even stronger, can be held and further accumulated. (Aging demographics plays and resource deletion plays such as SU, POT, SQM might qualify now too.)

One tactic worth discussing is that of gurus who continue to stock pick while hedging their portfolios but hedging the market. So no they are not really hedging their portfolios. These are I imperfect hedges yes, but like being put into quality value shares, aimed at levering up on market volatility. I believe Watsa and Einhorn may be doing this. So in a sense they are not sucking their thumbs.
The Science of Hitting
The Science of Hitting premium member - 1 year ago
"My view is that fairly valued markets don't necessarily have to move into overvalued markets. They may fluctuate between undervalued and fairly valued."

Of course they don't - and they don't have to fluctuate between undervalued and fairly valued either. They can go higher, lower, or nowhere from here - as is always the case.

I can understand trying to find the catalysts that will hint which one is most likely; I wouldn't say don't bother (maybe you can do it with some success; I have no reason to believe I could) - I just wouldn't swing between 100% equities and 100% cash based upon the conclusion one expects. Maybe you change your equity allocation by 10-20% based on these conclusions if you're so inclined to; thinking stocks are a bargain at 12X normalized earnings and an absolute sell at 20X earnings may not be the worst approach - you're just going to have long periods of time where it will be quite painful...

AlbertaSunwapta
AlbertaSunwapta - 1 year ago
"They can go higher, lower, or nowhere from here - as is always the case." Yes, exactly. In other words, the wait may be very, very painful. The flip side of a so called value trap situation could be a cash trap. (We're very reliant on both volatility and regression to the mean.)

Now, per my first post, if you can't find bargains within your circle of knowledge, why go to cash (or bonds, etc.)? Why not allocate all or substantially all or even 50% to equity index funds or ETFs ? Why sell a fully or overvalued position and then put the proceeds into cash? (Answer: On first thought one would say for certainty and carrying "a loaded gun", but...)

The Science of Hitting
The Science of Hitting premium member - 1 year ago
" [color=#333333; font-size: 12px; line-height: 18px]Now, per my first post, if you can't find bargains within your circle of knowledge, why go to cash (or bonds, etc.)? Why not allocate all or substantially all or even 50% to equity index funds or ETFs ?"

Well, assuming you have no reason to believe they're cheap, why would you? Along that same line of logic, why no go buy a house/apartment and rent it to someone, or a farm? The move to cash isn't a conscious move to stockpile money - it's driven by the fact that investments are no longer attractive, and there is no suitable alternative. I'm not sure I'm understanding your point about moving to an index fund; is it just to avoid missing upside if the markets continue higher? [/color]
AlbertaSunwapta
AlbertaSunwapta - 1 year ago
^ And that's where I have a problem too, buying something that doesn't appear to be cheap. Now some people (myself often included) say you can't reliably time the markets, markets are unpredictable, no metric will give you a true indication of its short term movement, etc. So most of the time people cant tell whether the market is cheap, expensive or fairly valued. In other words they have no reason to believe anything in terms of the market's value be it cheap, expensive or fairly valued. So in answer to your question, why would you not?

Moreover, look at this way, money invested in securities within your circle of competence would be the smart money. Unallocated cash proceeds from the sale of such securities or savings would essentially be dumb money (money waiting for an opportunity to deploy). Now if you think of what Buffett has recommended dumb money do, it's to invest in equity index funds when reasonable and pretend the market is closed... So why not accept some +/- market volatility in exchange for ownership in American business while you wait for a desirable equity opportunity.

So when you say that cash is a consequence of there being no suitable alternatives, I agree. Now my problem is that I may be wrong. That there is a suitable alternative and that is buying an equity index fund or ETF.

“Most investors, both institutional and individual, will find that the best way to own common stocks is through an index fund that charges minimal fees,” - Warren Buffett. (Note that this is substantially but not wholly his fees based argument.)

The above would essentially be a combination of options 2 and 5 of those Buffett mentions in the link below.

http://www.scribd.com/embeds/160301289/content?start_page=1&view_mode=scroll&access_key=key-zcgkzjhsy2fzhxnohm9&show_recommendations=true
vgm
Vgm - 1 year ago
Buffett telling us today, Nov 19, that he believes stocks are in "a zone of reasonableness"

http://www.cbsnews.com/8301-505268_162-57612947/warren-buffett-talks-all-time-record-highs-on-wall-street-stock-prices-in-the-future/
AlbertaSunwapta
AlbertaSunwapta - 1 year ago
So, is one comfortable holding their shares in such a market? If one owns good stocks that one is willing to hold for the long term (as in through a major recession) that are also in that zone, it seems reasonable to hold them and hope for a decline in their value for additional accumulation.

Good stocks that may not be good for the long term (many technology companies) are another matter. My view is that if those reach what can best be described as their fair / reasonable value the next question is their expected lifespan and any possibility of positive future growth (market expansion, new products, improved moat...) as well as the probability of a recession hitting and good old price correlation taking away a lot of the risk associated with all that value uncertainty.

Those that own the market (through indexes and ETFs) at fair value have to decide whether they are going to own the market long term and just accumulate on declines, or raise cash and 'hope' for a decline in the market. Again, "My view is that fairly valued markets don't necessarily have to move into overvalued markets. They may fluctuate between undervalued and fairly valued." Since I am risk adverse in terms of my index and technology shares, I've raised cash by selling them.

...but as I've tried to ask in postings above, the overall market is beyond my circle of competence so should I have continued to hold the market? Why ever raise cash, if not for a belief in correlation between overvalued circle of competence shares and the overall market?

Why not forever allocate between circle of competence shares and the market rather than selling and raising cash?

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