Paul,
<<<The classic lament of value investors is that they buy too early (and maybe sell too soon). I'm a believer that
this is so. I accept it and go with it. I'm not trying to compensate for it. Using stops might be popular with small investors; I don't recall any books I've read about value investing recommending this tactic though.>>>
As I see it cost averaging and stop loss selling are both strategies to correct mistakes. On one side the idea is to lower the break even point, on the other side the idea is to avoid riding an investment lower. I think it was Will Rogers who said, "Only buy stocks that go up after you buy them. If they don't go up after you buy them, don't buy them.". Unfortunately, he didn't write any books explaining how to do this.<g> OTOH, there have been plenty of books written on technical analysis and how to identify bottoms in a chart. Even though TA isn't considered "value investing", I think it would be hard to argue that a stock is ever as good a value as it is at the bottom.
I think I'd have to question any strategy that involves being so early, so often, that it becomes taken for granted that it is going to be that way most of the time. I don't see it as a matter of which is better; stops or cost averaging. If either method has to come into play too often, something else is wrong. Chart patterns form for fundamental reasons. I don't think you'll find a 5 year chart for any company where it isn't easy to see where the trends track earnings and growth. When earnings and growth are good, the stock goes up, when they aren't, the stock goes down. For anything other than day trading dead cat bounces, the only way those trends will reverse is for fundamental reasons. If the trend is down and a stock is making new 52 week lows on a regular basis, it's because the market recognizes fundamental reasons for not owning the stock at higher prices. In other words, it's not a good value, and trying to catch a falling knife isn't value investing as far as I'm concerned, at least if the theory behind value investing is to make money.
I probably stepped on a few sacred cows on this one, and hopefully everyone understands it's just an opinion. The worst lose I've taken to date was in a company that showed up as being a 3.2% holding by Berkshire Hathaway. The interesting part is after the company filed Chapter 11, Berkshire Hathaway didn't show up on any lists of shareholders. Warren stopped out while I got clobbered good averaging down, and it wasn't a good investment for either of us. If I had paid more attention to the chart I wouldn't have touched it in the first place. |
