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David Chulak
David Chulak
Articles (77) 

In Search of Treasure

May 14, 2013 | About:

As a child, I remember tunneling my way through a box of Cracker Jacks or through a box of the latest sugary cereal in search of the bottom, hoping my fingers could grasp the prize that was promised on the front of the box. Sometimes you would stretch out your fingers with the gratification that you could suddenly feel the bottom, though unable to actually see it. Now you might be able to locate your archeological treasure.

Sometimes, you thought that you had reached the cardboard bottom, only to find out that you had to tunnel a little bit more. You may have discovered that you weren’t as far down as you had thought. Often, it may have occurred to you that the prize really wasn’t all the way to the bottom of the box. Maybe the prize was omitted from this particular box.

I find the information disseminated regarding the stock market and the called “bottom and recovery” quite perplexing and just as hard to discover as that search for that hidden toy. It only takes a few minutes of searching on the Internet to see many proclaiming from the mountaintop that the bottom has been reached and that the prize of the advance ahead is within our grasp. After all, they proclaim, look at how well stocks have performed.

Others, on the other hand, indicate that the optimism displayed is premature. It’s no less puzzling than those that believe that Dow 36,000 is within our grasp, while others proclaim that Dow 6000 is more likely.

During the upheaval known as the Great Depression, the grandfather of value investing, Benjamin Graham, was still in his 30s and had already lost millions of dollars. One can only wonder where the economy of today is headed because even the very brightest disagree about the extent to which we may suffer in the days ahead.

“The economy is starting to recover.” “Europe will send us into a recession." “We are going to have another great depression." “We will have a lost decade (or two) like Japan." “We are creating new bubbles." These are expressions we hear every single day and if you are paying attention, you are probably making lots of mistakes based upon fear.

From Yahoo comes the following story headline:


From Political Gateway:


From CNN:


Before that, was a CNN poll from 2008:


Recently from Harry Dent:


Or you may have seen the following from NY Magazine:


You get a sense of all of this — period. Even the greatest of economist do not know for certain doom will come upon us. I’ve studied macroeconomics considerably and yet, while I have strong feelings as to why we will not see inflation any time in the near future or have a sense of when things could decidedly change and alter the direction of the market, I could be wrong. The truth is that there are so many variables to the economy (any economy) that one may make a forecast regarding the future based upon what’s happening and yet, no one can know with certainty the time table for all of the supposed future events… even if you are correct with your assessments.

I cannot possibly say it better than Seth Klarman, who in his masterpiece, “Margin of Safety," states:

One of the recurrent themes of this book is that the future is unpredictable. No one knows whether the economy will shrink or grow (or how fast), what the rate of inflation will be, and whether interest rates and share prices will rise or fall. Investors intent on avoiding loss consequently must position themselves to survive and even prosper under any circumstances (emphasis mine). Bad luck can befall you; mistakes happen. The river may overflow its banks only once or twice in a century, but you still buy flood insurance on your house each year. Similarly we may only have one or two economic depressions or financial panics in a century and hyperinflation may never ruin the U.S. economy, but the prudent, farsighted investor manages his or her portfolio with the knowledge that financial catastrophes can and do occur. Investors must be willing to forego some near-term return, if necessary, as an insurance premium against unexpected and unpredictable adversity.

Choosing to avoid loss is not a complete investment strategy; it says nothing about what to buy and sell, about which risks are acceptable and which are not. A loss-avoidance strategy does not mean that investors should hold all or even half of their portfolios in U.S. Treasury bills or own sizable caches of gold bullion. Rather, investors must be aware that the world can change unexpectedly and sometimes dramatically; the future I may be very different from the present or recent past. Investors must be prepared for any eventuality.

So what’s an investor to do? It’s time to get back to some of the basics and assess your positions. Are you really prepared to “survive and even prosper under any circumstances?” What does that mean to you as an investor? A few thoughts:

· If you are fully invested, do you have your sell rules in place? If not, you should be prepared and write down when you wish to get out and why. It’s easy to buy stocks. It’s not as clear as when we should sell them. Write down your sell rules and have them handy. Don’t panic at the next downturn. Pull out your rules….read them and respond exactly as your rules state. If you don’t, they aren’t rules, which indicate that you will probably continue to make moves exclusively on fear.

· While some investors scorn the idea of hedging a portfolio, are you hedged or do you need one? If so, which one is best? Will you feel safer with a predestined stop or trailing stop which will cash you in, in case of a major collapse? Is it in place? This is a major consideration during economic uncertainty. It’s better to make less and avoid losses if a hedge will make you sleep better at night.

· If you are not invested at all or are sitting on cash, are you prepared for the next downturn? “Valuations are high,” “valuations are low.” Do you know which the case is? Are you certain in your own mind? Or do you sit there and ponder without ever arriving at conclusions? Shakespeare’s Caesar stated, “That Cassius over there… He thinks too much." Do you tend to over think things?

· Are you learning from your mistakes? While many answer in the affirmative, most simply acknowledge a mistake and move on without really evaluating what took place. Why did I buy it? Did I use bad judgment? Should I have held it? Your losses are important. You should spend just as much time understanding your errors as choosing the next equity you intend to invest in.

Sir John Templeton: “The only way to avoid mistakes is not to invest—which is the biggest mistake of all”.

· If you are sitting on cash and you believe valuations are high and a downturn is coming, are you ready for the future? When there is “blood in the streets”, are you prepared to jump in? Buy low, sell high….remember. If you think stocks such as Coca-Cola (NYSE:KO) or Exxon (NYSE:XOM) are stocks you would love to own, have you determined what it would take to own them. Coca-Cola has been hovering around $42 per share. What’s a fair value that you would want to own it at? You need to know now and be ready. The discounted cash flow valuation may indicate a fair value of $30 - $50. At what point would you buy?

Sir John Templeton made the following prediction years ago: “By the time the 21st century begins… I think there is at least a chance that the Dow Jones Industrials may have reached 6000, perhaps more.”

None of us can be certain of the future. Not Warren Buffett. Not Seth Klarman. Not any other investing greats. But we should move ahead, cautiously optimistic that we can make money and avoid losses and prosper under the most difficult of circumstances.

Disclosure: I am long Coca-Cola (NYSE:KO)

About the author:

David Chulak
David Chulak is a private investor that uses a value approach to investing in the styles of Graham & Dodd and Warren Buffet. Looks for that margin of safety in an effort to preserve capital and attempts to guard against short term market fluctuations by having clear rules laid down in advance for selling an equity. Likes to visit the company's where his investments are in order to understand the business better.

Rating: 4.3/5 (4 votes)


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