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

To: jeffbas who wrote (6408)	3/23/1999 1:34:00 AM
From: James Clarke	Read Replies (6) \| Respond to of 78515

<<Is there anyone who thinks some of the bargains out there that have all but been ignored can appreciate in the face of such overvaluation in the large stocks? If no one can construct a case for it happening, we should probably sell everything and go on vacation.>> That is THE question. WARNING. Jim is about to talk about market timing. It is not a given, but let us assume the large cap stocks are way overvalued. I believe that rationally, not emotionally, and am willing to invest based on that, so for argument's sake, that underlies the following. Backing up the point is a waste of everybody's time. And it is a fact (whether this is "greater fool" or everybody's smart) that 75% of the money going into the market now is going into these large cap names. The question Jeffrey Bash put on the table is can we construct a case where the cheap small cap stocks, which represent very sensible value, go up in the face of this mania? In other words, even if a Clayton Homes or a LaSalle Hotel may represent absolute value in the long term, is it rational behavior to hold onto them now. The alternative would be to go fully into cash. I am thinking about that more and more. I am 30 years old, so I have not been through a mega-bear. But I read a lot. When I look back at the early 1970s, the last Nifty Fifty, the set-up was the same. Second tier stocks had underperformed for a couple years going into the peak, BUT WHEN THE BIG STOCKS BROKE, THE SMALLER ILLIQUID STOCKS GOT CRUSHED EVEN WORSE EVEN THOUGH THEY WERE "RELATIVELY CHEAP". (We saw the same thing last fall.) A few years later, about 1976, small stocks recovered big while the Nifty Fifty were still floundering. So in the end, value prevailed. But it took a long time, and you would have had every opportunity to buy these small stocks at ridiculously low prices if you had been in cash when the Nifty Fifty crashed. But what does that precedent tell me about what to do now? It tells me to sell everything now - provided of course that I don't have a large embedded tax liability. 1) If I want to own the smaller stocks I own now for the long term, I will have the opportunity to own them again at much lower prices if this scenario plays out. So even if I like the companies I own now, I lose nothing in this scenario, and stand to gain by buying back into the same stocks at lower prices. 2) When the levee breaks, I will have the opportunity to own the companies I want to own at reasonable prices, rather than being stuck with a portfolio of OK companies which happen to be cheap today. Make no mistake, if your portfolio drops 50% and your dream company falls into your buy range, you are going to have a hard time selling stocks to raise cash to buy something new. 3) Most of us have some debt. Unless it is a tax deductible mortgage, the interest rate is your opportunity cost for holding stocks. I have student loan debt at 8 1/4%. Do I really believe I can make better than 8 1/4%, and that's AFTER TAX and absolutely risk free? I'm not talking about credit card debt. If you've got a credit card balance and you've got money in the stock market, you need to get your head examined. I have been inches from selling my entire portfolio multiple times in the last month. Taxes are an issue on some of my holdings, but I haven't been patient enough or successful enough for that to be THE issue like it would be for some of you. Every time I look at the stocks I would sell though, I know why I own them, and I think they are undervalued. But I also know what I am seeing in the market and I see every day the psychology of its major players. I smell danger like it is right outside the window. The premise of all of this, of course, is that I consider the market at an historic top. 1929, early 1970s type. I have read and reread the books about those times and I think I've got a feel for the psycology of a monumental top. But I've never SEEN one. I work with people who started their careers in the late 60s. And to a man, they are scared to death. I am going to print this out, and read it tomorrow morning. Then I will read whatever is in my inbox on SI. And if I still feel like I do now, I will have a lot more cash by noon tomorrow. JJC