Buying into a market crash

[scorpioncapital]

If you know you'll have enough cash, by all means buy into a market crash. Otherwise, make sure you have the other half of the equation covered too, namely, selling into a market bubble.

 

 

 

[undervalued]

In Klarman's 2015 end of year letter he says:

 

If investors could know only one thing about greed and fear, they should know this: Over

the 30-year period from 1984 to 2013, the Standard & Poor’s 500 Index returned an annualized

11.1%. Yet according to Ashvin Chhabra, head of Euclidean Capital and author of “The

Aspirational Investor,” the average returns earned by investors in equity mutual funds over the

same period was “a paltry 3.7% per year, about one-third of the index return.” Bond fund

investors fared even worse: while the Barclays Aggregate Bond Index returned an annualized

7.7%, investors in these funds “captured just 0.7% (not a misprint!) in annualized returns… That

staggering underperformance is the cost that individual investors paid for following their

instincts” by adding to and pulling money out of their funds at precisely the wrong times. In

short, retail investors, in aggregate, substantially underperformed both the markets and the very

funds in which they were invested.

 

 

I hear the appeal of buying crap in a downturn, but I think there are serious issues with that thinking.

1. Some, maybe a lot will not make it through. When you look at stock charts there's some serious survival bias in there.

2. Once everything rebounds u sell the crap to take your money out but the good stuff is expensive again so you're stuck with non productive cash waiting for the next crash while the good stuff keeps appreciating in value.

 

When stuff goes on sale you go to buy that car or tv or whatever that you've always wanted. What not go get what you've always wanted when stocks go on sale

 

Precisely.  Had I just kept sbux, home depot, amex and ge since 2009 I would have been up:

Sbux: - 600% plus a growing dividend

HD: - 600% + > 16$ in dividends

Amex: 400% +'14$ dividends

Ge:' 300% + 6$ dividends

Also bought wells fargo: which would have returned 300% plus dividends.

 

To top it off the positions I had were via Leaps, so the gains were huge.  Exercising the options would have saved me a bundle in taxes as well, as oppose to selling. 

 

There is simply no way I could duplicate the long term outperformance buying "lesser" companies. 

 

Then there is the psychology of the moment.  In 2009 things were not rosy.  We had no idea if things were going to back pedal anytime - they didn't - but we didn't know that at the time.  The best place to be was the companies that would still be around, making at least some money.

 

It amazes me how easily people forget trying to pull the trigger during a severe market downturn.  Its real easy to sit here right now and say "just buy crap"..... it'll go up by 10 times.  Try visualizing actually pulling the trigger in 2009 and then trying to hold onto your "crap" after it has gone up 1.5x.  I will wager almost no one can do it.  I know I cant.  But I do know that If I have a plan in place to buy certain companies that are absolute top seed, then I will be able to pull the trigger, and more importantly hold them through the inevitable market gyrations as things slowly recover. 

 

 

I bought some of these names but I did not earn 6x because I couldn't time it exactly at the lowest point and some I sold too early. And averaging down gets harder and harder as the position gets larger and larger.

 

I think I read somewhere that while looking back everything is so clear but the future is so blurry.

[Uccmal]

In Klarman's 2015 end of year letter he says:

 

If investors could know only one thing about greed and fear, they should know this: Over

the 30-year period from 1984 to 2013, the Standard & Poor’s 500 Index returned an annualized

11.1%. Yet according to Ashvin Chhabra, head of Euclidean Capital and author of “The

Aspirational Investor,” the average returns earned by investors in equity mutual funds over the

same period was “a paltry 3.7% per year, about one-third of the index return.” Bond fund

investors fared even worse: while the Barclays Aggregate Bond Index returned an annualized

7.7%, investors in these funds “captured just 0.7% (not a misprint!) in annualized returns… That

staggering underperformance is the cost that individual investors paid for following their

instincts” by adding to and pulling money out of their funds at precisely the wrong times. In

short, retail investors, in aggregate, substantially underperformed both the markets and the very

funds in which they were invested.

 

 

I hear the appeal of buying crap in a downturn, but I think there are serious issues with that thinking.

1. Some, maybe a lot will not make it through. When you look at stock charts there's some serious survival bias in there.

2. Once everything rebounds u sell the crap to take your money out but the good stuff is expensive again so you're stuck with non productive cash waiting for the next crash while the good stuff keeps appreciating in value.

 

When stuff goes on sale you go to buy that car or tv or whatever that you've always wanted. What not go get what you've always wanted when stocks go on sale

 

Precisely.  Had I just kept sbux, home depot, amex and ge since 2009 I would have been up:

Sbux: - 600% plus a growing dividend

HD: - 600% + > 16$ in dividends

Amex: 400% +'14$ dividends

Ge:' 300% + 6$ dividends

Also bought wells fargo: which would have returned 300% plus dividends.

 

To top it off the positions I had were via Leaps, so the gains were huge.  Exercising the options would have saved me a bundle in taxes as well, as oppose to selling. 

 

There is simply no way I could duplicate the long term outperformance buying "lesser" companies. 

 

Then there is the psychology of the moment.  In 2009 things were not rosy.  We had no idea if things were going to back pedal anytime - they didn't - but we didn't know that at the time.  The best place to be was the companies that would still be around, making at least some money.

 

It amazes me how easily people forget trying to pull the trigger during a severe market downturn.  Its real easy to sit here right now and say "just buy crap"..... it'll go up by 10 times.  Try visualizing actually pulling the trigger in 2009 and then trying to hold onto your "crap" after it has gone up 1.5x.  I will wager almost no one can do it.  I know I cant.  But I do know that If I have a plan in place to buy certain companies that are absolute top seed, then I will be able to pull the trigger, and more importantly hold them through the inevitable market gyrations as things slowly recover. 

 

 

I bought some of these names but I did not earn 6x because I couldn't time it exactly at the lowest point and some I sold too early. And averaging down gets harder and harder as the position gets larger and larger.

 

I think I read somewhere that while looking back everything is so clear but the future is so blurry.

 

Yeah, well thats why I sold out the options when I did, after a significant rebound.  The future in late 2009 and into 2010 was real messy.  Hindsight is of course 20/20.  But there is nothing wrong with thinking about a process based on what has worked in the past (more than once). 

 

If markets plummet 40%, with the best companies down 30% and weaker companies down much greater and we get a 2009 type rebound then the weaker companies would give a better return.  But the 2009 rebound was uncharacteristic in its recovery soeed and was driven by gov't imtervention. 

 

If we dont get a 2009 type rebound and head into a situation more like the 1970s then blue chips may rebound faster and better, and at least most of them will pay dividends along the way.  Big companies, excepting financials, generally maintain their dividends through recessions.

[Jurgis]

It amazes me how easily people forget trying to pull the trigger during a severe market downturn.  Its real easy to sit here right now and say "just buy crap"..... it'll go up by 10 times.  Try visualizing actually pulling the trigger in 2009 and then trying to hold onto your "crap" after it has gone up 1.5x.  I will wager almost no one can do it.

 

Not sure if this is aimed at me, but no, I did not forget 2009 and yes, I bought crap during it.

 

I'm not telling you what to do. You're free to make your own mind. I'm not even saying that I will buy crap if the crash comes. It will depend.

 

Good luck

[Uccmal]

SD, Why BUD instead of Heineken/FEMSAs or some of the smaller beer cos that may be acquired? BUD seems pretty pricey. Not criticizing or anything just curious of your view.

 

Uccmal, why RY in Canada?

 

RY is the biggest bank in Canada.  They have operations in the US and around the world.  They have regularly raised their dividend for a century and Have not cut it, at least not recently, that I am aware of.  There is no real reason not to include one of the others: TD, BMO, or BNS.  I can only stomach so many banks so its Royal.  Its nice to operate in an Oligopoly.

[Spekulatius]

If we talk about crap we should probably define "crap". For me "crap" is a shitty business attached to a treasure box and i just pay 50-75% of the price of the treasure box and i get the shitty business for free. This looks a lot safer to me than buying a compounder in the hope it compounds further.

 

I thought this way for a long time, but now I think it is not true. A shitty business attached to a treasure box is very risky, because the treasure box becomes a piggy bank and the next thing, it is gone. Betting that a compounder continues to compound it actually very safe in comparison.

[wachtwoord]

If we talk about crap we should probably define "crap". For me "crap" is a shitty business attached to a treasure box and i just pay 50-75% of the price of the treasure box and i get the shitty business for free. This looks a lot safer to me than buying a compounder in the hope it compounds further.

 

I thought this way for a long time, but now I think it is not true. A shitty business attached to a treasure box is very risky, because the treasure box becomes a piggy bank and the next thing, it is gone. Betting that a compounder continues to compound it actually very safe in comparison.

 

Not when you define crappy here as still profitable but with terrible ROE. That's a kind of investment I like a lot.

[james22]

Keeping in mind Prem's:

 

... I keep thinking about this all the time, so Ben Graham was reflecting in the ‘30s and he writes, if you were not bearish, if you're not concerned about the economy in 1925, not in 1927, 28, 29, but in 1925, there was only a 1/100 chance that you survived the depression, because what'd you have looked at was if you were not bearish in 1925, you'd have seen the crash in 1929, drop 50%, and you'd have come right in and thought of it as an opportunity, because the Dow Jones dropped from 400 to 200, went back up to 300, and the second leg after that was a killer, dropping about 90%!!

 

I'll buy the compounders. Because who knows the bottom? They more likely to survive any second leg.

[SharperDingaan]

If you truly believed there will be a crash of this nature, you had puts &/or synthetic options profiting from the drop. If this wasn't part of your strategy, you need to be reconsidering it. We hedge for a reason, and expect it to pay.

 

Everybody is going to be sh1ting themselves, talking a lot, but actually doing nothing. We know that's a good market entry point, but few will take it - because we all 'know' the market is going lower. Perfectly valid if there's a good business reason for thinking that (ie: today's offshore drilling), but most often it's self destructive.

 

If it is about wealth, time frame is going to decide it. Indexes if it is a short-term punt on the 'turn around' capabilities of central bank intervention, distressed convertibles if it is a medium term 'hook up', leaps and physical on name brand equities if it is a long term marriage. If it is about 'entertainment' - all this is irrelevant. Obviously the younger you are, and the greater your ability to not 'meddle' in your decisions once you've made them, the wealthier you're going to become.

 

You also need to be mindful as to what you're ultimately going to do with the wealth. Once you've paid off all the mortgages, seeded the various 'trusts', bought all the houses and cars, etc. - because crashes happen routinely, and you've learnt how to use them. Obviously, there are lots of possibilities, but ultimately you need to control the wealth - and not let it control you.

 

Most folks aren't successful.

 

SD

 

 

 

 

 

 

 

   

 

 

 

 

[undervalued]

Keeping in mind Prem's:

 

... I keep thinking about this all the time, so Ben Graham was reflecting in the ‘30s and he writes, if you were not bearish, if you're not concerned about the economy in 1925, not in 1927, 28, 29, but in 1925, there was only a 1/100 chance that you survived the depression, because what'd you have looked at was if you were not bearish in 1925, you'd have seen the crash in 1929, drop 50%, and you'd have come right in and thought of it as an opportunity, because the Dow Jones dropped from 400 to 200, went back up to 300, and the second leg after that was a killer, dropping about 90%!!

 

I'll buy the compounders. Because who knows the bottom? They more likely to survive any second leg.

 

Here is a guy who lived through that http://www.telegraph.co.uk/money/special-reports/how-to-invest-like-warren-buffetts-hero-philip-carret/