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Dynamic Dividend
Eric Houssels

Once Bitten, Twice Shy

January 15, 2011

Driving about my locality the other day, I overheard the old cliché “once bitten, twice shy” used by a radioman in some or another context. It dawned on me that these four simple words should have particular meaning to those of us in the emotions-laden public investments arena. More specifically for my camp – the hate-to-losers, the cliché (at least on this day) spoke to the pains and lessons and opportunities of bear markets.

My personal tale of the last ferocious bear is as such. We were cautious throughout 2004 and 2005, having never really believed the prices of the large-cap, TMT bubble to have adjusted downward enough. I could go so far as to say we were disciplined, as we stuck to waiting for the right prices for our good businesses with their solid earnings and manageable balance sheets. After a couple of years of the tediousness of waiting, we began to loosen the good business constraint and found several opportunities in no earnings, stretched balance sheet companies (Six Flags, anyone?). Lo and behold, throughout 2006 and the first half of 2007, this foray into the less-than-stellar (another name for this type is junk) was rewarded with well-above index performance. Boy, were we smart, and then something funny happened…the bear growled.

Fortunately, we did realize many of the errors of our ways in reasonably short order and managed to escape with less damage than had we stubbornly saw the positions through (several to their ultimate annihilation). This lesson of junk avoidance is a good one, and one I intend to not repeat (at least not as egregiously) for the rest of my investment career. It was what transpired after unwinding our lapse into junk that presents a more challenging lesson going forward.

Throughout the latter part of 2007 and through all of 2008, we bought into many good companies at reasonable prices only to watch these prices sink (some cratered). The 2008, early 2009 15 months were an emotionally excruciating experience for a rookie bear market investor. Luckily, a goodly amount of stubbornness is part of a fundamentals-based value investor’s natural make-up; we hung tough through the period while pulling our hair out on a seemingly daily basis. Without a doubt, nonetheless, these 15 months “bit,” drew blood, and scarred our naiveté away.

In hindsight, the real lesson of 2008-09 was just what compelling opportunities bear markets are for fundamentals valuationists. Sensible opportunities abounded in this period and undertaking them (or simply holding onto them) proved, for my operation, to be the opportunity of the decade. To turn back to our cliché and its investment lesson/warning: when the next bear market asserts, it simply will not pay to be “shy.” Being early is and will be painful and should be somewhat sought to be avoided. But not participating at all – shying away from the previous pain, if you will – will be the greatest sin of all.

Enjoy the rest of the bull but remember the bear and be ready for the great opportunities he will bring!

About the author:

Eric Houssels
Charlie Tian, Ph.D. - Founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

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