As I write this, The Dow Jones Index stands at 24855. And it almost seems as if the gains of the past 12 months would soon bee erased. But not just yet perhaps? We are 10 years into a bull market and are in the last innings of a bull run, never imagined to stretch this long. The Shiller PE Ratio stands at 30.82 for the S&P 500 and nearly equals the Shiller PE Ratio just as Black Tuesday hit the markets some 9 decades ago.
Source : http://www.multpl.com/shiller-pe/
We don’t know what is going to happen here at TheHolyFinancier but it is safe to say that the probability of a recession grows with each passing month as we head forward.
At TheHolyfinancier, we have pared some of our holdings down and have recycled that capital into stocks with a larger margin of safety, where the reward to risk ratio is higher. And also, we are on the lookout for stocks which could be multibaggers as always.
All in all, a good time to be an investor when markets do indeed go down. But we are not market timers because we feel that it is a complete folly to time the market. While systematic risks brings most stocks down with them, there are also micro factors that can cause stocks to appreciate even in a recession. Yes, even in a recession, stocks can rise. So the way we see it is that we own a portfolio of securities with different maturity dates and if some micro factors within a stock plays up, we would be happy to sell out and recycle that capital into other stocks.
And then, there will be securities that naturally mature later but we are fine by that as long as the margin of safety in the stock persists and the it has an attractive risk to reward ratio. We want an overall positive expected return in our portfolio and that is what we are after at the end of the day.
Concerning major market draw downs, I think that it should not be a predominant worry if you pick the right stocks. This reminds me of a question which was asked to Charlie Munger about the decline in Berkshire’s share price. And to this, he replied that it did not concern him one bit. I reproduce the question and the answer he gave in response to it.
Question : How worried by the decline in the share price of Berkshire Hathaway…
Answer : Zero. This is the third time that Warren and I have seen our holdings of Berkshire go down top tick to bottom tick by 50% I think it is in the nature of long term shareholding with the normal vicissitudes in worldly outcomes and markets that the long term holder has his quoted value of his stock go down and then by say 50%…I think you can argue that if you are not willign to react with equanimity to a market price decline of 50%2 or 3 times a century, you are not fit to be a common shareholder and you deserve the mediocre results you are going to get compared to the people who do have the temperament who can be more philosophical about these market fluctuations.
As you can see, the sages of investing don’t really care. They are not at all attached to money that us ordinary folks are. In fact, I opine that it is this unattachment that helps them to amass the kind of wealth they did. This is perhaps something that we mere mortals can learn from.
As always, may you be blessed with prosperity, health and happiness!
These books which I have written are case study driven and discuss strategies, mindsets and situational approaches to employing the net current asset value strategy.
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- A database of net net stocks or net current asset value stocks
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- Blog articles and investing education
- Investing research of deep value stocks