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Eric Houssels
Eric Houssels
Articles 

NOS, SAAPs, and EPM

November 23, 2007

It is November of 2007 and what I like to call the Numbers-on-screeners (or NOS) are ruling the financial markets. Oil and its commodity cousins go up because they have gone up (and might just continue going up through December 31st which is all that matters for this crowd), the US dollar goes down because that has worked too, and anything US financial has to be sold at any price (SAAP). This is the fundamentalist’s nightmare and also his finest hour.

The NOS of the world are playing a casino game. They have money, they legally exchange it for a roll of the dice, and then they settle up with their banker. Stocks are not pieces of businesses to them, they are numbers on the screen that move up and down quickly, the direction depending on whose “story” is winning the day.

We fundamentalists, on the other hand, are doing something else. We are pricing assets as intelligently as we can. We are, in effect, tagging our stocks with a number that a strategic, rational buyer for the whole company (and its future cash flow!) would have to contend. In other words, the price of a company’s assets, and the future cash that it will produce from them, matter to us.

Selling financials at any price represents a tremendous opportunity for us. I confess to feeling like a bit of a “sap” myself when I buy, for instance, ORI only to watch it immediately dribble down from my purchase price. But this is just the very natural first dollar loss, recency bias emotion expressing itself. The rational side of my brain, however, is thankful to whom I believe to be the true “sap” here, the sell at any price crowd.

Entry price matters (EPM). Come November of 2010, it will be very interesting to see how this cornerstone principle of fundamental investing has treated today’s investors in commodities and financials, respectively.


- by Eric Houssels

About the author:

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

Rating: 3.2/5 (14 votes)

Comments

danielw
Danielw - 9 years ago    Report SPAM


If you think commodity prices are going up simply because they've gone up, you couldn't be more wrong.

For one, not all commodities are going up. Nickel has had a huge correction, from around 24 earlier in the year to 13 roughly today (dollars per pound). Zinc has gone from 2 down to 1.

Beyond that, to argue that this whole field is speculative, or that the people buying the stocks aren't concerned with buying businesses, has me scratching my head. I could give you lots of reasons why commodities are a good place to be now--and why commodity stocks are even more attractive.

If you did searches of different commodity stocks on this board, you would find that actually a lot of the really great investors aren't just doubling down on stocks that continue to tank. They're buying companies like CHK, POT, CNQ, SU, RIO, BHP and so on.

As for selling financials at any price, I think this also misinterprets what a lot of people are doing. Some are actively shorting financials--and they're value investors with very impressive track records (Chanos, Ackman, Rogers).

I have watched the sell-off in financials (mostly) from afar but I still think that better value exists in certain commodity names. The one exception is that I recently have been buying 2010 LEAPS on Brookfield Asset Management.

--Daniel

http://danielwahl.blogspot.com/
jimprit
Jimprit - 9 years ago    Report SPAM
I hope you are right, because I am thinking a lot like you right now.
ehoussels
Ehoussels - 9 years ago    Report SPAM
Danielw,

I don't know about commodities, that is my stance. Their prices ultimately will be set by supply and demand, that is my belief. And as prices go up, ultimately demand will offset. What is odd to me is that a majority of the commodity crowd IMO can't articulate supply and demand characteristics in terms of real quantities other than to say that China and India are growing alot. This does not seem like an investable thesis and thought process that is repeatable over one's career.

As for the gurus who are buying, I imagine most of them (but not all) are buying for what they believe to be solid reasons based on quantities. They may be right. And the ones shorting financials may be right, as well. What I do know, and I am sure you would agree, is that at the end of the day, we need to think for ourselves. I hope that those LEAPS on Brookfield bring you big profits!

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