Heraclitus that view, of whether the macro economics picture matters, depends on your approach to the markets and trading. I don’t have any stock positions, whether generating dividends or not. All my trading is with derivatives, typically 3- 6mth positions but I have 2 year Options at the moment. I trade long or short exactly the same way. It’s critical for me to have a big picture road map of where the market is heading and whether bull or bear phase.
But for those who hold “quality businesses”, I’d challenged that value investor mantra of just holding though downturns. I believe most experienced investors should be able to make better judgements than that and you will do a lot better if you can sell stocks (or any asset) when it’s fully priced, and then deploy that capital to buy different under-valued assets when they emerge.
So for example, Telstra ran in its latest bull phase from $2.55 to $6.45 over 4 and a bit years. I’d expect it will now come off 61.8% from its high over a year or two and then it’s got to get back up over its highs again which could take another year or two or more. If interest rates go higher the dividend isn’t as valuable and that’s a long time to hold on and a big opportunity cost of tying up capital that could be better deployed. The businesses outlook can also change through a lengthy holding period with unexpected market forces changing the quality of the business and you're snookered in trying to continue to hold on and recover. Remember too that Telstra fell for 12 years before the current rise and still only recovered 2/3s of its previous high.
CBA similarly ran from $23.90 up to $96.17 in a record low interest environment chased up by divvy hunters. That’s a lot of value to give up.
Pisces is correct in recognising that jumping in and out of stocks is a losing approach. But you should be forming a view as to whether we are in a “correction” or a new bear market. In fact it helps me in setting short positions to understand this value investing psychology. The first 10%, 20% and even 30% fall into a correction will have the value investors crowing their credentials as long-term smart investors that don’t get caught up the wide swings of volatile markets like amatuers. But you wait until the loses keep going and get to 40% and 50% and more from the highs in a bear market as more and more long term holders give up and join the selling. That’s how declines can go on longer and deeper than people first expect. I love you value guys in those times.
I think we’re coming into a phase now where we are going to grind down a lot deeper than just a short correction that you should hold through. It will be interesting to follow up with you in due course if that eventuates to see how your philosophy on holding on to quality stocks is bearing up.
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