In almost every other walk of life, people buy more at lower prices; in the stock and bond market they seem to buy more at higher prices. (James Grant)
The October 1987 crash was a learning lab for all serious investors. As a result, investors came to understand that markets are never cured of their propensity to overheat and then to overcorrect. Markets may be continually in search of intrinsic value, but they do it the way a hunting dog searches for a scent. They rush madly back and forth across the clue, sniffing everywhere. The process can appear quite frenetic, even when the dog is on the track.
“Disregarding for the moment whether the prevailing level of stock prices on January 1, 1987, was logical, we are certain that the value of American industry in the aggregate had not increased by 44 percent as of August 25. Similarly, it is highly unlikely that the value of American industry declined by 23 percent on a single day, October 19,” wrote William Ruane and Richard Cunniff in the Sequoia Fund 1987 third-quarter report.
When a stock is undervalued, the stage is set for reversal. On that April 1995 day when Kirk Kerkorian and Lee Iacocca made a takeover move on Chrysler, did the actual value of the stock rocket from $39 per share to $55 per share overnight? Probably not. By most analytical standards, with a price-to-earnings ratio of 4, Chrysler was undervalued at $39. The takeover bid alerted investors to Chrysler’s situation, and at the beginning of September 1995, nearly 4 months afterward, the shares were still trading at around $55; even then the PE was only 8.
Such is the scatterbrained behavior of someone Benjamin Graham called “Mr. Market.”
To say that a value investor does not “play the market” is not to say that market cycles don’t exist and that they do not play an important role in the work of investing. One needs only to examine a chart of the movement of the DJIA over a long period of time – 10, 20 years or more – to see that there are wavelike advances and retreats in aggregate stock prices. Value investors realize that they cannot predict how low or how high a market indicator will move, or when a reversal will come. Market ebbs and flows are, admits Graham, an essential part of successful investing.
THRIVING IN EVERY MARKET
Value Investing Made Easy (Janet Lowe):
- THRIVING IN EVERY MARKET
- MR. MARKET
- SUITABLE SECURITIES AT SUITABLE PRICES
- PAYING RESPECT TO THE MARKET
- TIMING VERSUS PRICING
- BELIEVING A BULL MARKET
- THE PAUSE AT THE TOP OF THE ROLLER COASTER
- MAKING FRIENDS WITH A BEAR
- BARGAINS AT THE BOTTOM
- SIGNS AT THE BOTTOM
- BUYING TIME
- IF YOU ABSOLUTELY MUST PLAY THE HORSES