Coach''s blogSunday, June 3, 2007.
I believe we at currently at an interval in the market that is critical for exposing the mindset of individual investors. The PM sector has been through a rough few weeks, with daily declines across the board occurring mostly on low volume. During this sort of trading regime, which is nothing new for the sector, it tends to bring into play the weaknesses that may lurk in the approach that some people take for investing. It is very easy in other words for people to be aggressive and fearless when the stocks are going up. When that inevitable correction appears, some may find that their conviction disappears, and amid the uncertainty of the market, many will sell at a loss.
Those who invest rationally however, and focus on value, with an in-depth understanding of what they own and why they buy, will manage through the market corrections. They were likely less aggressive buying the tops in the first place, and are more disciplined in their trading. They will not be shaken or concerned if the market turns extremely ugly for a period of time, because they have done their homework and understand how the short term volatility can push stocks to extremes.
The key point in this discussion is that it is ESSENTIAL that investors understand what they own. Only with this basis of research can people fully appreciate if a company has actually grown stronger in the business model, even while its share capital may be weaker. Any rational investor would agree that the case to buy a company is more compelling if the company has grown but the market value is declining. Time and time again however, rationality takes a back seat to fear and ignorance.
The time when it is probably the most optimum to be a buyer is most likely when a weak investor is going to be compelled to sell. People will make excuses and justify their decisions, suggesting they will just sell until things settle down and then buy back in at lower prices, and it sounds smart. But very few people are ever able to do so. And the violence of a correction, and the subsequent recovery, make it very difficult to time these moves. Usually, a stock will have made a recovery before the timid investor has repurchased it and established a position below where it was sold. The opportunity is lost.
I cannot advise anyone on which stocks will be suitable for their own weaknesses in pschycology. I can only share information that will hopefully make people better educated in their choices to widthstand the violent choppy trading that is sure to characterize the sector. How much to allocate, and whether to participate in the juniors at all, is up to the individual.
So to return to my original point, I think we are at a defining moment right now. So few people are confident about the near term. Most analysts are bearish, and I suspect most retail investors have sold at least some of their holdings during the last few weeks. Yet the market may be on the verge of a major rally, at a time when few are expecting it, just as the sector is famous for. Will people understand that holding value is the appropriate course?
The bottom line in all of this is that it emphasizes the need to take a longer term outlook on investment decisions. Speculators can jump in or out with remarkable agility, but investing implies a fundamental understanding of the company and the market sector, and therefore that development often takes many months to play out, while market volatility can occur over weeks or months. If you buy quality and then become concerned over a normal and expected market downturn, then your fear will undermine your opportunity for success.
Be an investor. Determine what a company is working to achieve and monitor the progress. Be proactive in the market, timing your action to buy weakness and sell strength. Know the difference in duration between a development cycle and a market cycle. The most important variable that will determine the performance of an investment is the ability to find quality companies and buy aggressively when the market temporarily prices them at a discount.
We may or may not get a strong recovery this week. Perhaps the reversal on Thursday and Friday were just counter-cyclical gyrations in what will be a prolonged correction. I do not pretend to know, and frankly, I do not care. I was a buyer during the selling and I am content to hold for the inevitable recovery whenever that may arrive. But woe to them that were selling the lows and must now watch from the sidelines if in fact we see a strong rebound play out this week.
Next year we will probably see the same kind of ups and downs. Perhaps those that got caught on the wrong side of a trade will recognize this as part of the ongoing education we all face as investors, and be better prepared for the next wave.
I describe myself as a perma-bull. I do not worry trying to time the corrections or sell ahead of them. My outlook is based on the expectation that we are in a generational long cycle bull market, with many years ahead to enjoy. Therefore any short term losses sustained will be recovered and then some, in short order. I know that my outlook is not compatible with the expectations of everyone else out there, so just take these comments in the context they are written, and hopefully it will help others to form their own effective strategy.
cheers!
COACH247