The nonsense of the "falling knife"
"When is it time to buy stocks again?" This was the question on everyone's lips at the Asia Trader & Investor Convention over the weekend. Like Singapore investors, Malaysians are just as keen to dive back into the markets. It's quite apparent that most people who showed up at the Kuala Lumpur Convention Centre were biding their time, getting ready to pounce once things turned. This is almost the smartest thing investors can do. Almost. While the Dow Jones Industrials Average gyrates in 300-point ranges, investors who've got their eye on the long term are not perturbed. They use the steady compass of valuations. They are, to borrow the oft-used phrase, walking placidly amid the noise and haste.
Which brings me to my favourite hobby horse: conventional un-wisdom. Stuff that people truck out and cling to because it sounds comforting, but which either makes no sense at all or contradicts common sense. Here are my two favourites:
"Good things come to those who wait". What nonsense! Anyone who teaches their children to take opportunities as they come along will know that this is pure and utter rubbish expounded only by those too lazy to get off their butts and make things happen. Plus it contradicts that other great adage, "don't wait for your ship to come in, swim out to it". Or as Confucius put it: "A man who stands on a hill with his mouth open will wait a long time for roast duck to drop in."
This is just as true in the markets as it is in other aspects of your life.
A worse version of the above is:
"No one wants to catch a falling knife". Here is another phrase which analysts use to explain the absence of buyers. This is more a sign of ignorance and the absence of a strategy than any real, valuable insight. The sentence means that no one knows how far the market is going to fall, and therefore anyone who buys in now will get "cut" as prices fall further.
Implicit in this sentence is the assumption that we don't know how far the proverbial knife is going to fall. I don't profess to be an analyst, nor do I know how far the market is going to fall. But then, I don't care about how far the market is going to fall. What I, and most investors, want to know is when valuations are reasonable, even when you take into consideration a decline in earnings. Only when you look at stock specifics, and forget about the market, do you start to get clarity.
The knife is not falling. In fact, there is no knife. It's more like a gold pan. Slowly we're washing out all the mud and rocks. What remain are nuggets. Those nuggets may fall in price before they shine through. But nuggets always shine through in the end.
Mark Laudi, who prefers to use the elevator metaphor. It doesn't matter which floor you're on, or even if your elevator goes down in the short term before riding up in the long-term - as long as the elevator you take is of good quality.
To comment on this blog, go to the Investor Central blog.
Visit the brand new Investor Central website! for free SMS alerts to news about stocks in your watchlist
Which brings me to my favourite hobby horse: conventional un-wisdom. Stuff that people truck out and cling to because it sounds comforting, but which either makes no sense at all or contradicts common sense. Here are my two favourites:
"Good things come to those who wait". What nonsense! Anyone who teaches their children to take opportunities as they come along will know that this is pure and utter rubbish expounded only by those too lazy to get off their butts and make things happen. Plus it contradicts that other great adage, "don't wait for your ship to come in, swim out to it". Or as Confucius put it: "A man who stands on a hill with his mouth open will wait a long time for roast duck to drop in."
This is just as true in the markets as it is in other aspects of your life.
A worse version of the above is:
"No one wants to catch a falling knife". Here is another phrase which analysts use to explain the absence of buyers. This is more a sign of ignorance and the absence of a strategy than any real, valuable insight. The sentence means that no one knows how far the market is going to fall, and therefore anyone who buys in now will get "cut" as prices fall further.
Implicit in this sentence is the assumption that we don't know how far the proverbial knife is going to fall. I don't profess to be an analyst, nor do I know how far the market is going to fall. But then, I don't care about how far the market is going to fall. What I, and most investors, want to know is when valuations are reasonable, even when you take into consideration a decline in earnings. Only when you look at stock specifics, and forget about the market, do you start to get clarity.
The knife is not falling. In fact, there is no knife. It's more like a gold pan. Slowly we're washing out all the mud and rocks. What remain are nuggets. Those nuggets may fall in price before they shine through. But nuggets always shine through in the end.
Mark Laudi, who prefers to use the elevator metaphor. It doesn't matter which floor you're on, or even if your elevator goes down in the short term before riding up in the long-term - as long as the elevator you take is of good quality.
To comment on this blog, go to the Investor Central blog.
Visit the brand new Investor Central website! for free SMS alerts to news about stocks in your watchlist
Labels: Asia Trader Investor Convention, falling knife, Good things come to those who wait
GIC: Catching the falling ball
The mood was one of apprehension but also opportunity at a private client event for high net worth customers of a major international private bank at a local hotel earlier today. Apprehension, because of the volatility in equities markets and uncertainty about a recession. Opportunity, because these clients are already thinking about where they can buy good quality assets cheaply.
The bank's chief economist and head of equity strategy were on hand to give their prognoses, which was for the US to slip into recession, followed by a rebound later this year. A similar forecast could have been delivered by any number of economists at any number of private banks.
The point is: the big individual investors are slightly anxious about where all this is headed, but they are not letting this cloud their perspective. They are quite happy to ride out the short to mid term volatility, and not because age is on their side. Because in many cases it isn't. They are willing to ride it out because they understand that panicking doesn't help. They know from experience that crises are never complete, there is always a silver lining.
In this context, the conversation turned to the oft-used truism that "no one wants to catch a falling knife". In other words, no one wants to buy stocks which are in freefall, lest they fall some more. The problem with this truism is that it isn't true. Most stocks, unlike knives, bounce. They don't just go down, they go up again, too. So, stocks are more like balls. Sure, you may not want to catch it as it is still falling. But if you buy quality companies, chances are they'll bounce right back, even if you make a short-term loss.
This theory could be applied to the Government of Singapore Investment Corporation (GIC), which bought large stakes in, for example, UBS, for huge sums of money. Was it worried about a falling knife? It could possibly have picked up this stake for less money. But it already saw value, and decided that a short term loss would be worth the long term gain that it stands to make.
That said, GIC possibly had other national interests at heart. I haven't asked GIC about this, but some of the members of the private bank luncheon were fairly convinced that GIC bought the stake not just for the potential financial return on its investment, but also its ability to call the shots at UBS. It has not sought a seat on the board. But it doesn’t need it. Perhaps all it wanted was to secure UBS' commitment to keep Singapore as its regional HQ. You don't need a directorship to get that. If this theory is correct, Singapore will reap a return infinitely higher than the inevitable improvement in UBS' shareprice.
Mark Laudi, who emceed the private client briefing
To comment on this blog, go to the Investor Central blog.
ArchivesThe bank's chief economist and head of equity strategy were on hand to give their prognoses, which was for the US to slip into recession, followed by a rebound later this year. A similar forecast could have been delivered by any number of economists at any number of private banks.
The point is: the big individual investors are slightly anxious about where all this is headed, but they are not letting this cloud their perspective. They are quite happy to ride out the short to mid term volatility, and not because age is on their side. Because in many cases it isn't. They are willing to ride it out because they understand that panicking doesn't help. They know from experience that crises are never complete, there is always a silver lining.
In this context, the conversation turned to the oft-used truism that "no one wants to catch a falling knife". In other words, no one wants to buy stocks which are in freefall, lest they fall some more. The problem with this truism is that it isn't true. Most stocks, unlike knives, bounce. They don't just go down, they go up again, too. So, stocks are more like balls. Sure, you may not want to catch it as it is still falling. But if you buy quality companies, chances are they'll bounce right back, even if you make a short-term loss.
This theory could be applied to the Government of Singapore Investment Corporation (GIC), which bought large stakes in, for example, UBS, for huge sums of money. Was it worried about a falling knife? It could possibly have picked up this stake for less money. But it already saw value, and decided that a short term loss would be worth the long term gain that it stands to make.
That said, GIC possibly had other national interests at heart. I haven't asked GIC about this, but some of the members of the private bank luncheon were fairly convinced that GIC bought the stake not just for the potential financial return on its investment, but also its ability to call the shots at UBS. It has not sought a seat on the board. But it doesn’t need it. Perhaps all it wanted was to secure UBS' commitment to keep Singapore as its regional HQ. You don't need a directorship to get that. If this theory is correct, Singapore will reap a return infinitely higher than the inevitable improvement in UBS' shareprice.
Mark Laudi, who emceed the private client briefing
To comment on this blog, go to the Investor Central blog.
Labels: falling knife, GIC, Government of Singapore Investment Corporation, market declines
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