"Lethargy, bordering on sloth should remain the cornerstone of an investment style. "
- Warren Buffett
We discuss a broad range of issues that are often investment-related, but not always so. We call it a 'thought blog'. Sagacious: Having or showing keen discernment, sound judgment, and farsightedness.
Value Investors Catch a Break
Today, the S&P 500 experienced its largest loss in 5 months, down almost 1.4%. This is the fifth largest decline this year and one of only 13 days this year that were down more than 1.00% (we’ve had 15 that were up more than 1%). While I would not say that stock market valuations are getting out of hand, after its recent run-up it’s nice to see a day where the stock market is down. It reminds us that volatility is something to be expected when investing in stocks.
What has troubled me over the last couple months is the low volatility of the recent rally. We have not had a day down more than 1% since July 13th. July 12th was also down more than 1%. Today, the decline was broad-based, with some 90% of the S&P trading lower and 27 of the 30 Dow stocks declining. Is this the start of a “correction”? Maybe or maybe not.
In the seven trading days beginning with July 12th, the market was down about 1.8%. In the seven trading days starting with June 6th, the S&P 500 was down 5%. For 2006, after the first -1% drop in a while, two-thirds of subsequent seven-day trading periods were followed by market declines. The average performance this year for the seven days starting with a –1% day? Down 2.3%.
I’ve got to say it’s a relief to see that the market can actually go down. Though undervalued stocks can be found in every type of market – think Apollo (APOL) – a couple more days like this and we might find a few more stocks in the bargain bin.
Ability to Pass Up Investments is Key
As Warren Buffett has said, the ability to say “No” is one of the most important powers an investor has. Knowing when to turn down an investment can be more important as when to say yes. Another way I’ve heard Buffett look at it is to imagine as an investor that you’ve got a 20-slot punch card that represents your lifetime of investment decisions to be made. Looking at it from this perspective, it’s likely each investment decision will be made more carefully.
Another crucial part of making good investment decisions is being aware of your own biases. These biases are well-documented in behavioral finance: overconfidence, hindsight bias, overreaction, belief perseverance, and regret avoidance, for example. Knowing where you decisions are coming from helps to determine whether your choices are truly objective and rational, not overly influenced by your own biases.
Another crucial part of making good investment decisions is being aware of your own biases. These biases are well-documented in behavioral finance: overconfidence, hindsight bias, overreaction, belief perseverance, and regret avoidance, for example. Knowing where you decisions are coming from helps to determine whether your choices are truly objective and rational, not overly influenced by your own biases.
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