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Strategies & Market Trends : Value Investing -- Ignore unavailable to you. Want to Upgrade?

To: Jurgis Bekepuris who wrote (51813)	6/30/2013 2:05:41 AM
From: E_K_S	1 Recommendation Recommended By CusterInvestor Respond to of 78774

Value Investing - Psychology and Temperament Jurgis, I will add one more category to the list: Value Investing Basics – Psychology and Temperament Out of college I was a believer in the "Efficient Market Theory" but after several years of analyzing the market, it really is not especially in the small cap universe. There is now just so much more money (specifically from hedge funds and private equity funds) that with what little hidden value plays you might find can and does get blown up when a hedge fund decides to exit a trade and run to the exit door. We see these "risk-on" and "risk-off" leverage index plays now all the time. This skews the "true" value of the markets. To me, a lot of this short term noise is due to Psychology & Temperament which is almost impossible to factor into a value buy. At a whim, private equity and/or a hedge fund will move out of the market and/or use some sophisticated hedging/option strategy that affects (in the short term) market prices. This could be the result of some statement (or non statement) by the Fed chairman or released minutes w/ fund managers reading between the lines to cause a risk-on or risk-off trading strategy. Even with my own value buys where I have done my research and know I have a bargain, I begin to second guess myself as the general market turns sour and/or the stock continues to fall (even below TBV). There is no sound "long term" reason that AAUKY, VALE or even RIO should be selling where they are now (10% or more below their TBV) but I suspect they will move lower. It's the Psychology of the investor that impacts the market and at times can become a feedback loop both on the upside and on the downside accelerating gains and/or losses. In all cases the true value of the companies have not really changed but according to the way Mr. Market has priced it... it has. I would guess since 2005, the market moves are amplified by (1)more hedge fund/private equity money, (2) Algorithmic trading, (3) High-Frequency Trading and perhaps (4) derivative trades (including repurchase agreements, CDOs and other highly leveraged speculations). All these factors skew the true value of stocks. Eventually we do see a "reversion to the mean" which Paul Senior highlights in many of his trades but now this deviation is getting much larger both on the upside and downs side. That's why I always use the 2% Bollinger band analysis when buying and/or selling as well as 50 & 200 day MA price points. So when the market Psychology sours (like in 2008/2009) even that "margin of safety" that Graham discusses goes out the door. In times like that, I seek capital preservation first and new "value" buys second. EKS