Mr. Buffett’s famed advice to “be fearful when others are greedy, and greedy when they are fearful” is one of the true pillars of value investing. The intrinsic values of the good companies do evolve over time but usually at a slow pace; their valuations, however, can and do oscillate wildly with the whims of the manic Mr. Market. We are to make Mr. Market our friend and use his over-reactions to our advantage. This concept is simple enough, in theory.
In practice, however, I have run into a bit of difficulty with the above wisdom. Namely, it is not always so obvious just when Mr. Market is truly fearful or truly greedy (except in hindsight, of course). During the LBO nonsense of 2006-07, it was fairly clear than he was getting greedy; we all should have been out for some, or even a lot, of this time period (I, personally, do not mind missing tops, if I feel I am exiting positions at somewhere near my approximations of full value).
The harder era to discern was (is) the bear market one that followed. Very early in the bear, many small cap and some blue-chip financials traded at significant discounts to book value and had significant clouds of fear hanging over them. I, unfortunately, waded into the fear and was proven, from a fundamentals standpoint, to be flat-out wrong. At the height of the July 2008 commodities froth, one could have waded into the feared anti-commodities retail, financial, and consumer stocks and, while he would have been right through about October 1 st, wading into the fear would have again proven fairly painful/too early by February 2009.
It is clear, then, that it is difficult to time the fear and the greed perfectly; nevertheless, to a certain extent, we need to try our best. Here is a simple six-square that helps me to cope with the difficulties of timing:
| Mr. Market = Greedy | Mr. Market = Fearful |
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| Lazy | Will hold on too long and may have hard time selling; will dent “ethic of discipline” | Will be chronically underinvested; may knee-jerk into foolishness because of this |
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| Perfect | Hall of Famer (and probably kidding yourself) | Hall of Famer (and probably kidding yourself) |
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| Too Eager | Miss the froth stage but make good $, most likely; stuck to discipline and received deserved success | Forced to endure the pain of loss aversion; if thinking is correct and can endure the pain, will/should work out over time |
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I clearly offer no prescriptions for the preferred middle row above, and I can assure that this is not for a lack of effort or desire. I have looked at how far markets fall, how long it takes them to get there, and have tried to size my strikes accordingly, only to find my conclusions to be far from perfect, a la the classic military operation where it is a certainty that nothing will ever go to plan. The prescription I do, however, offer is to be “too eager”-biased.
Our efforts, our focus as value investing fundamentalists must be on the (surprise surprise!) fundamentals and our intrinsic values. When investments quote below, at a significant enough discount to warrant a good profit (others term this the margin of safety), our intrinsic values, waiting is simply illogical, an anathema to our focus and discipline. Similarly, when our holdings reach full value, holding is nothing other than speculation, pure and simple. The six square communicates my belief that erring on the side of laziness undermines discipline and threatens to invite the dreaded “emotions” into the investment process. Erring on the side of eagerness, however, acknowledges the discipline of the fundamentalist process and, if met by the positive feedback of satisfactory long-term results (not a given, as we must remember that nothing is easy in this industry or this world), will yield an operation that can repeat its deserved successes.
As a final aside, I am curious as to where like-minded value fundamentalists think we are currently in the fear-greed cycle. Dow 6500 appears in hindsight to be a fear point; is Dow 8500 a greed point? Is there a dichotomy between oil/industrials/global growth fear/greed and that of the consumer and financial stocks?
