Lessons from the Early/Mid Innings of the Last Bear
Note that I originally penned this ditty at the outset of August and since, as we all know, the situation has changed (I have had to add the “mid” to the title above). Knowing now what we did not know at the beginning of last month, I would mark the start of the current bear market at the closing high reached on April 29… welcome to month five!
The market certainly had a good run from the crater-bottom of 3/09 all the way to the high of 4/11 (26 months). Just as night follows day, the bear has followed the bull and it behooves us to game plan accordingly.
For those of us value-starved over the latter part of the mini-bull market, this game plan is of critical import. The cash war-chest of my portfolios had grown considerably during the run-up and I’ve, quite naturally, got an itchy trigger finger at this point. So acknowledged, the first lesson from the early/mid innings of the last bear is discovered:
Be careful.
Do not squander that hard-earned capital that was built from discipline, sound analysis, and the necessary courage that produced it. We simply don’t need to dance with the first girl that we see. I remember vividly the days at the end of July 2007 when many of my positions began to sell-off and I redoubled down on them with gleeful naïveté. And what ended up happening was that I had blown all my dry powder and had to play sell-to-buy over the next 20 months. While sell-to-buy can work, it is inherently/arithmetically (when the entire market is falling) less efficacious and much more stressful and thereby distracting. Be careful (but not lazy) early — a patient and steady hand ends up with the marathoner’s prize.
Focus on quality.
Quality bought at a reasonable or somewhat discounted price will produce attractive multi-year returns. Moreover, buying in these innings, while, in all likelihood not at the bottom (and good luck finding the guy who consistently hits the bottom!), helps to relieve the pressure valve of inactivity in the face of compelling valuations. Begin positions in these innings with the thought and intent to be able to add to them (perhaps substantially) as the bear ages. Junk early is apt to get wiped, as weaker companies are inherently more at risk when the tide recedes. If not wiped, kinda-cheap junk early will tend to become screamingly-5-bagger-cheap junk later… or, in other words, wait for the fattest of pitches when swinging here. Let time be our friend with these home runs.
Finally, don’t beat yourself up.
When it’s early or midway, expect reasonable investments to decrease in quotational value, for that is simply how bear markets work. Maintain a steady plan to accumulate larger positions opportunistically. As the bear market runs its course, be flexible and adapt (and don’t be afraid to sell a mediocre financial on a major short squeeze, a la September 2008). But do not beat yourself up for not bottom-ticking. Sound decisions will payoff over time and requiring perfection in one’s entry point is an exercise in futile and debilitating narcissism. The larger risk in a bear market is inaction, failing to get your hard-won capital to work when it is truly advantageous to do so. Let us not forget our Graham: “Courage becomes the supreme virtue after adequate knowledge and a tested judgment are at hand.”
Eric Houssels is the co-founder and managing member of Houssels Capital Management LLC, a money management firm based in Las Vegas, Nev. The firm focuses on investments in the stocks of publicly traded companies of all capitalizations that possess, preferably, significant earnings power or, alternatively, assets that can be (re)deployed to achieve significant earnings power and are trading at reasonable valuations. Houssels Capital Management was founded in 2000.
Note that I originally penned this ditty at the outset of August and since, as we all know, the situation has changed (I have had to add the “mid” to the title above). Knowing now what we did not know at the beginning of last month, I would mark the start of the current bear market at the closing high reached on April 29… welcome to month five!
The market certainly had a good run from the crater-bottom of 3/09 all the way to the high of 4/11 (26 months). Just as night follows day, the bear has followed the bull and it behooves us to game plan accordingly.
For those of us value-starved over the latter part of the mini-bull market, this game plan is of critical import. The cash war-chest of my portfolios had grown considerably during the run-up and I’ve, quite naturally, got an itchy trigger finger at this point. So acknowledged, the first lesson from the early/mid innings of the last bear is discovered:
Be careful.
Do not squander that hard-earned capital that was built from discipline, sound analysis, and the necessary courage that produced it. We simply don’t need to dance with the first girl that we see. I remember vividly the days at the end of July 2007 when many of my positions began to sell-off and I redoubled down on them with gleeful naïveté. And what ended up happening was that I had blown all my dry powder and had to play sell-to-buy over the next 20 months. While sell-to-buy can work, it is inherently/arithmetically (when the entire market is falling) less efficacious and much more stressful and thereby distracting. Be careful (but not lazy) early — a patient and steady hand ends up with the marathoner’s prize.
Focus on quality.
Quality bought at a reasonable or somewhat discounted price will produce attractive multi-year returns. Moreover, buying in these innings, while, in all likelihood not at the bottom (and good luck finding the guy who consistently hits the bottom!), helps to relieve the pressure valve of inactivity in the face of compelling valuations. Begin positions in these innings with the thought and intent to be able to add to them (perhaps substantially) as the bear ages. Junk early is apt to get wiped, as weaker companies are inherently more at risk when the tide recedes. If not wiped, kinda-cheap junk early will tend to become screamingly-5-bagger-cheap junk later… or, in other words, wait for the fattest of pitches when swinging here. Let time be our friend with these home runs.
Finally, don’t beat yourself up.
When it’s early or midway, expect reasonable investments to decrease in quotational value, for that is simply how bear markets work. Maintain a steady plan to accumulate larger positions opportunistically. As the bear market runs its course, be flexible and adapt (and don’t be afraid to sell a mediocre financial on a major short squeeze, a la September 2008). But do not beat yourself up for not bottom-ticking. Sound decisions will payoff over time and requiring perfection in one’s entry point is an exercise in futile and debilitating narcissism. The larger risk in a bear market is inaction, failing to get your hard-won capital to work when it is truly advantageous to do so. Let us not forget our Graham: “Courage becomes the supreme virtue after adequate knowledge and a tested judgment are at hand.”
Eric Houssels is the co-founder and managing member of Houssels Capital Management LLC, a money management firm based in Las Vegas, Nev. The firm focuses on investments in the stocks of publicly traded companies of all capitalizations that possess, preferably, significant earnings power or, alternatively, assets that can be (re)deployed to achieve significant earnings power and are trading at reasonable valuations. Houssels Capital Management was founded in 2000.
