Let the bargain hunting begin

galumay said:

I guess for traders and speculators who see shares as just a commodity with a variable price, then the outlook and response may be very different?

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I fit this category and the recent volatility has been pretty tasty.

Julia said:

If the market drops another few hundred points in the near or medium term future, will today's purchases still be bargains?

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The definition of a "bargain" in a traders mind is when trader is very optimistic (due to a previously rising trend). He projects that prices will rise indefinitely, so todays dip appears as a bargain.

But lets assume that after couple of years market will reach 2000-3000 levels. Do you still think traders will name any bargains? NO. Shares will be so expensive, that nobody wants to buy them. They start looking for reasons-that fundamentals are bad, earnings are negative, no dividends, and thus let's say NAB pricing at $5 will be still very expensive. That's how limbic system works.
Financial markets do amazing tricks in the brain-it react opposite as to the normal things, like you go to the shop see a shoes sale of -80% and the greed immediately steps in. But when you see market drop of -80% you are scared to death and stock are the last thing you want to buy. The opposite is near the tops-all stocks appear bargains, and reasoning for this is found very quickly.

When I hear the word "bargain" within the long rising trend, I am cautious at least, because real bargains are only when the blood is on the streets.

Hi

To what extent do you think the current weakness in markets is due to:

1. Deteriorating underlying fundamentals (ie. not likely to recover for reasons of price action)
2. Re-assessment of unreasonably low required risk margin (became less expensive)
3. Moving from fair risk margin to higher than long term risk margin (markets become cheaper)
3. Re-assessment of relative value (eg. Bonds are better risk adjusted investments now)
4. Reduction of exposure driven by financing matters related to the investor (eg. available leverage is being pulled)
5. Animal spirits
6. Other (Please specify)

Thanks. Curious about the spread of opinion given differing viewpoints which have been expressed recently.

DeepState said:

Hi

To what extent do you think the current weakness in markets is due to:

1. Deteriorating underlying fundamentals (ie. not likely to recover for reasons of price action)
2. Re-assessment of unreasonably low required risk margin (became less expensive)
3. Moving from fair risk margin to higher than long term risk margin (markets become cheaper)
3. Re-assessment of relative value (eg. Bonds are better risk adjusted investments now)
4. Reduction of exposure driven by financing matters related to the investor (eg. available leverage is being pulled)
5. Animal spirits
6. Other (Please specify)

Thanks. Curious about the spread of opinion given differing viewpoints which have been expressed recently.

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I personally think that No. 5 is responsible.

Julia said:

If the market drops another few hundred points in the near or medium term future, will today's purchases still be bargains?

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No.
Just count the number of risers that bucked yesterday's 100-pt drop; multiplied by 3 to 10, the odds become infinitesimal.

pixel said:

No.
Just count the number of risers that bucked yesterday's 100-pt drop; multiplied by 3 to 10, the odds become infinitesimal.

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Hi Pixel

Would your response change at all if Julia said "long term" as opposed to a shorter/medium (say less than a year) time frame?

Cheers

DeepState said:

Hi

To what extent do you think the current weakness in markets is due to:

1. Deteriorating underlying fundamentals (ie. not likely to recover for reasons of price action)
2. Re-assessment of unreasonably low required risk margin (became less expensive)
3. Moving from fair risk margin to higher than long term risk margin (markets become cheaper)
3. Re-assessment of relative value (eg. Bonds are better risk adjusted investments now)
4. Reduction of exposure driven by financing matters related to the investor (eg. available leverage is being pulled)
5. Animal spirits
6. Other (Please specify)

Thanks. Curious about the spread of opinion given differing viewpoints which have been expressed recently.

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I am with rimtas, 5. looks the most likely to me.

DeepState said:

Hi Pixel

Would your response change at all if Julia said "long term" as opposed to a shorter/medium (say less than a year) time frame?

Cheers

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No, it wouldn't;
the reason: If I could buy in coming months twice as many or more xyz shares as I could at today's "bargain basement prices", it would still feel wrong - even IF they'd regain current levels in a year or two.

pixel said:

No, it wouldn't;
the reason: If I could buy in coming months twice as many or more xyz shares as I could at today's "bargain basement prices", it would still feel wrong - even IF they'd regain current levels in a year or two.

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Thanks Pixel.

FWIW, my response would have been "it depends" to both questions. Annoyingly unsatisfying, I know.

DeepState said:

Thanks Pixel.

FWIW, my response would have been "it depends" to both questions. Annoyingly unsatisfying, I know.

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LOL, of course "it depends"
It depends on Julia's premise coming true. Which I see a real chance that it does. Hence my reply.

But obviously, if the premise turns out incorrect, and if the global Markets rally from last night's Lows, any rebounding Long position will put a smile on the Holder's dial and generate many "...told youse".

DeepState said:

FWIW, my response would have been "it depends" to both questions. Annoyingly unsatisfying, I know.

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Now, RY, you need to elaborate. "It depends" isn't in the spirit of furthering the discussion. You always have clear reasons for everything so please share what they are in this instance.
(asking in the most polite and humble way, of course.)

pixel said:

LOL, of course "it depends"
It depends on Julia's premise coming true. Which I see a real chance that it does. Hence my reply.

But obviously, if the premise turns out incorrect, and if the global Markets rally from last night's Lows, any rebounding Long position will put a smile on the Holder's dial and generate many "...told youse".

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"....told youse".

Re this

If I could buy in coming months twice as many or more xyz shares as I could at today's "bargain basement prices", it would still feel wrong - even IF they'd regain current levels in a year or two.

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My response also. But here's where I'm hypocritical enough to refer back to RY's "it depends" above.
All I've had in the market for some time is a relatively small p/f of stocks chosen for grossed up yield, and entered when at call cash rates fell below what was acceptable.

For the first time ever I bought these stocks (overweight banks) with the intention of holding through any downturn on the basis that I don't believe any of them will not ultimately recover and - as long as dividends are not cut - the yield is about twice what would be attained in the bank.

In the event, however, I'm finding it a very counter-intuitive and uncomfortable process.

Had I been fully or almost fully invested, I'd have been completely out a couple of weeks ago at least, preserving profits and waiting for clear uptrend before re-entry.

Julia said:

Had I been fully or almost fully invested, I'd have been completely out a couple of weeks ago at least, preserving profits and waiting for clear uptrend before re-entry.

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I suppose thats why the market as a whole is so irrational, we are all doing different things for different reasons! If we all thought the same and used the same strategies the market would be totally stagnant!!

Julia said:

Now, RY, you need to elaborate. "It depends" isn't in the spirit of furthering the discussion. You always have clear reasons for everything so please share what they are in this instance.
(asking in the most polite and humble way, of course.)

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All you gotta do is ask.

When is a stock a bargain? One simple answer is that it subsequently makes you more money than you would normally expect or require for the risk taken. You can whack a timeframe on that if you like.

That could happen by blind luck, or it may be because you bought in on the basis of good fundamentals (or T/A if you like) which, through trials and tribulations, remained good enough that the stock price benefited from the net outcome. So we have a lucky bargain and an earned bargain.

Let's ignore the lucky bargain scenario. It is trivial in the sense that we win some and lose some. There's no skill in it. If we 'bend the distribution' without edge, you end up in the same place or worse anyway.

So, a market goes down in price. There is no statement here about whether fundamentals changed or whether a market just became less expensive. If all it reflects is that fundamentals deteriorated, it has not become more of a bargain for reasons of changes in fundamentals. If the price declines by more than the fundamentals would suggest, it has become cheaper, but is not necessarily cheap.

So, my response was 'it depends' because a bargain needs to be defined by price and fundamentals. To me, if you buy a stock at a discount to valuation (beware that your estimate may be wildly different to reality), you are buying a bargain. If it becomes cheaper, you are buying more of a bargain.

The forgone economic benefit of delaying your purchase until the price fell further needs to be assessed considering the probabilities that prevailed at the time of the first decision (you can think of regret as pairs of decisions). All you can do is make the best probable decision at any given time. This goes further...

At your first decision point, you will make a guess about whether the stock will continue to deteriorate or it is about as bad as it is going to get. You may actually choose to get set even if you think it might weaken further because you feel that the price is good enough and you would regret it if the stock price bounced in the direction of your longer term expectation...bummer!

What happens to prices after your estimate is made is outcome. Outcomes are just one possibility in a whole massive spectrum of them. The difference between the subsequent price movement and your guess of what it would be is essentially luck. The main thing to focus on there is just risk management. Bad luck can be seriously painful and can wipe you out before it all evens out over the longer term. Luck is just luck. Nothing that is worthy of regret or regarding as a missed opportunity in a skillful sense when selecting stocks.

So what does all that diatribe come down to?

Buy stocks which are cheap relative to their fundamentals. They should do better over time. If the market should present you with an even better opportunity, take it if your risk management allows and don't regret the first decision if your analysis was sound. Focus on what you can control. The rest is just conversation....which I kind of like.

Stock markets go from over valued to under valued and back again. That's happened enough times now, with enough markets in different countries, to consider it a fact.

Without wanting to go off topic, the same could be said for politics. It swings from Labor to Liberal and back again. It has done that many times in Australia, and the same happens overseas with the only real difference being the names of the parties.

Now, using the political example it could be said that there have been relatively few occasions when the major parties did not act in a predictable manner on a major issue. Argue all you like about the detail, but as a whole the majority of policies are consistent with a broad policy agenda and thus reasonably predictable.

So why then to people change their vote? Sure, not everyone does, but enough do to bring about a change of government periodically. And yet ultimately, not much has really changed beyond some relatively minor details. That lack of a fundamental reasons to do so doesn't stop people changing their vote however.

Markets seem much the same. To some extent, things just happen. We go from a high P/E to a low P/E during a secular bear and vice versa during a secular bull. It's hard to point to a specific reason as to why, but it happens in practice.

Anything involving sentiment of the masses is hard to explain in terms of "why". Try explaining "why" in terms of fashion (as in clothing)? Why is a certain colour no longer a good one? What changed? There's just one example of an entire industry that lacks any real rational basis and yet it's been around far longer than you or I.

Then there's things like broad shifts in attitude. Over the past 40 years, just half a human lifetime, we've seen a massive shift in popular opinion on the issues of (1) human health and (2) protection of the natural environment. It's pretty much a complete reversal over that time - what was "normal" and taken for granted is now considered totally unacceptable and vice versa. There are so many examples relating to both issues, that it would be easier to list what *hasn't* changed than what has.

Markets are just another reflection of human thought. Trying to come to grips with the "why" question is largely futile in my view, the only thing that's worse being to try and fight it.

All you have to do is ask

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OK, thanks for detailed response.

Next question: does it come down to this?

The main thing to focus on there is just risk management.

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Question after that:
"Surely risk management will vary immensely according to the personal circumstances of individuals"?

ie someone aged 20 will have a different take on what constitutes risk than will someone in retirement.

Julia said:

OK, thanks for detailed response.

Next question: does it come down to this?



Question after that:
"Surely risk management will vary immensely according to the personal circumstances of individuals"?

ie someone aged 20 will have a different take on what constitutes risk than will someone in retirement.

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Risk management keeps you alive for long enough so that your source of returns can shine through. In general, someone aged 20 will have a relatively small investment balance and a massive asset in the form of expected future income. For the most part, they can tolerate a lot of investment risk unless they are barely making their interest payments. However, just because they can take risk doesn't mean that they will. We all have different tolerances for risk no matter what stage of life we are at.

There are different kinds of risk. Not meeting your realistic target objective in the long run is the key one. But it would be unrealistic to think there aren't a whole lot of smaller risk management initiatives to keep you within your zone of comfort along the way and allow for things like liquidity where this was relevant.

DeepState said:

We all have different tolerances for risk no matter what stage of life we are at.

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I think thats an important fact, also I think sometimes people forget to consider consequence in partnership with risk. Which leads me back to one of Buffett's primary filters - catostrophic risk. Something might be low risk but if the consequences would be total loss of capital then he would dismiss it as a potential investment.

pixel said:

...and if the global Markets rally from last night's Lows...

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What a flogging the indices, commodities and AUD took. More pain on the cards here for Monday. Looking pretty crook to me, interesting times ahead. My shopping list is starting to get small.

DeepState said:

Hi

To what extent do you think the current weakness in markets is due to:

1. Deteriorating underlying fundamentals (ie. not likely to recover for reasons of price action)
2. Re-assessment of unreasonably low required risk margin (became less expensive)
3. Moving from fair risk margin to higher than long term risk margin (markets become cheaper)
3. Re-assessment of relative value (eg. Bonds are better risk adjusted investments now)
4. Reduction of exposure driven by financing matters related to the investor (eg. available leverage is being pulled)
5. Animal spirits
6. Other (Please specify)

Thanks. Curious about the spread of opinion given differing viewpoints which have been expressed recently.

Click to expand...

1. 20%. Iron ore, coal and the looming LNG cliff are the primary drivers of the deteriorating fundamentals. It will play out in arenas like lower government revenue and sector-specific declines, and subsequent flow-on effects (employment loss in support industries, regional property price declines, tougher tax policies etc).

2. 50%. Absolutely. I see the A-REITs as a prime example. The office sector is facing higher vacancies yet share prices are at 6 year highers while yielding <5% with little growth. It's the chase for yield gone too far.

3. 20%. Stocks are arguably still better value than bonds in absolute terms. But the difference isnt' as extreme as before - and it's always the marginal buyer/seller who sets the price.

4. Have not heard that being the case.

5. 10%. There is always a bit of that. Those who sell first, sell best. Plus the fact that with $AUD and ASX being so inter-related, it becomes a bit of selfulling prophecy.

6. 0%. I am of the opinion that we have past the peak of growth driven capitalism. Since WWII the world economy was driven by growth, and the growth came from both productivity gains (industrial production) and population growth. While we are still seeing productivity gains, it feels like most of the easy miles have been made in the industrial sphere. New age GDP's are much more abstract and less demanding on many physical resources. Demographics will start to become a negative driver to growth, as the ratio between those working and those retired and spending continue to decrease. The growth driven economy has been fine for 60-70 years but it will now enter untested territories (although I'd also argue that Japan is the leader in this phase).

There will be shocks in the adjustment periods that no one is seeing now, and it will happen in our lifetime pretty soon.

skc said:

There will be shocks in the adjustment periods that no one is seeing now, and it will happen in our lifetime pretty soon.

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As someone in their young 20s having just entered the work force full time, this is a terrifying thought. Add to that the increasing automation of jobs (look at Woolies and Coles registers as an easy example) and it feels soon there will simply be not enough jobs to go round...

McDonalds automated self-order:

https://www.youtube.com/watch?v=e3J66Aub16o