Portfolio Rebalancing
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Putting thought into your investments is critical, it is also the antithesis of buy and hold. I believe it was Buffet who said that knowledge is your best hedge against risk. My point in the rebalancing comment is that if you have investments at historical highs such as equities in the late 90's and you take some of your capital gains and put those into Reits or physical real estate or some other true diversification from equities, you stand a better chance of protecting those profits from an equity correction. I am talking about long term trends of 5 to 20 years.
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March 1985 the S&P 500 hit an all time high of 183. It broke 300 two years later. July of 1989 it hit an all time high of 346. It proceeded to regularly make all time highs for about 13 years straight after that. Why would you want to rebalance out of that market? BTW, the mid to late 80s is when Buffett was making big commitments to Coke, among others. He never rebalanced out of those positions and still sits on huge profits today.
Ben Graham (or Buffett) would say the time to sell is when your estimated valuation of the stock is close to it's price. If the company (Coke for example) keeps increasing in value, and price never catches up, the time to sell is "never".
Of course, with Coke, Buffett didn't sell even when price clearly exceeded value around 2000. He freely admits that was a big mistake, partly driven by having his hands tied as a board member.
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Portfolio Rebalancing
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Your statements about options are correct, as far as they go. Covered calls are not a good solution in bull markets, but if your of a mind to hold a large stock position come hell or high water, and you find yourself in a sideways to down market, covered calls can be one way to lower your holding costs.
Personally, I am more of a trend following investor who prefers to time my entries and exits using a quantitative trend following model, using options purely as leveraged long plays if at all.
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Ben would say you never know whether a sideways or down market will continue, or when it will stop. Ben (and Warren) believes you can't predict trends, that it's better to use value as your guide and trust the market will eventually recognize that value.
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Intrinsic Value and Value Investing
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I am somewhat sceptical of anyone talking about value stock investing at the current valuations as I feel they are just below all time historical highs and have quite a bit of downside before they can called value stocks in the historical sense.
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The commonly used term "value stocks" has little to do with value investing. Academics describe value stocks as stocks with low PE or low price to book. That's not even close to true. Buffett paid an above market PE for Coke when he bought it, and with a large price to book.
Value investing simply means every stock has an intrinsic value (IV) separate from it's price. Value investors try to buy stocks trading at a discount to their intrinsic value. Some stocks are bad "value stocks" because they are either over priced, or their IV is difficult to estimate. But at the right price, any stock is a value stock.
And the fact that the market has reached a historical high recently is neither evidence stocks are over-valued or under-valued. Their true value is based on the discounted value of their future stream of earnings. The Dow recently hit a peak it hand't seen for over 5 years. I don't know if at that price the Dow is fairly valued or not, but I am certain it is much more valuable than it was 5 years ago, simply because it's earnings are higher.
As we get farther in TII, more of these concepts will become apparent.
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