Greed and Fear

Warren Buffett once gave a very useful and simple advice to investors-- he suggested that the recipe for long-term success in investing is "to be fearful when others are greedy and greedy only when others are fearful".

Looking at the markets these days, I can't help but see the [unfounded] enthusiasm return to the market. Greed and complacency is back, producing almost frothy behaviour on Wall Street. Just look at securities such as Netflix (NFLX) and OPENTABLE (OPEN) selling at PE ratios of 67 and 154, respectively.

This behaviour makes me quite fearful.

Consequently, I have started to sell my fully priced investments. I may miss the top of the market, i.e. the local maxima; but I sleep better at nights knowing that I am only owning undervalued securities with a reasonable margin of safety. There is certainly nothing wrong in sitting on a pile of cash either. If the "animal spirits" in the market go for long, I am prepared to miss it and earn non-existent yield on my cash balance. Historically speaking, current exorbitant PE ratios have produced negative to mediocre yields in the long term. With history on my side, I don't mind sitting on some cash.

The S&P 500 index is currently available at 10 year average PE ratio of 23.22. This is a 42.4% premium to the long term average PE10 of 16.3.

Mean reversion is bound to follow.

I just don't know when it would happen. I am not going to bother predicting-- I happen to be very bad at that.

Niall Ferguson: Empires on the Edge of Chaos

An excellent history lecture on the rise and collapse (not fall, collapse) of empires. His perspective is firmly based in finance. As always, Niall is an entertaining speaker and an author/historian that I greatly respect.



Enjoy.

In investing, It’s When You Start And When You Finish that Matters

New York times has an interesting infographic showing stock market (S&P 500) returns over long time periods. The article stresses when you put money in and take it out it is of great importance. Staying invested in markets for extended periods of time without paying attention to the buying valuation is not a recipe for success. For example, 1961-1981, a 20 year period yielded -2.1% per annum.

Value investors are well aware of this fact and also know that this has to do with valuation (e.g. P/E ratios), which the article unfortunately neglects to mention.