Somewhat unique business, very uniqe management, page-37

Mars,

Your investment philosophy is refreshingly different from the average user/contributor to the HotCopper forum, and bears much similarity to my own, with enough elements of apparent difference to warrant so edifying debate.

I sense that one differential aspect relates to our respective views of what constitutes a black swan.

Correct me if I'm wrong, but I sense you define a black swan event as some extraneous and unanticipated occurrence that adversely and materially impacts the broader value of the share market, including the shares you personally hold.

To this end, events that you might cite as examples of black swan event are the following:

The European Debt Scare of 2011
The GFC of 2008/9
The Global Economic Slowdown of 2002/3
The Bursting of the Dot Com bubble of 2000
The Asian Financial Crisis of 1997/8
The Global Economic Recession of 1992/3
The Stock Market Crash of 1987


Would I be right in assuming this?

And , at the risk of causing insult, I think these sorts of events are also what the overwhelming majority of investors see as "black swan" events, that cause them financial damage.

And yet history teaches us quite clearly that this is not what causes permanent damage to the capital of stock market investors.

Temporary damage, yes. But not permanent damage. (Had you been living on a desert island for the two or so years that each of the major market ructions, listed above, occurred, on your return to civilisation you would have been largely (and probably blissfully) unaware that anything major had occurred based on the updated value of your portfolio.)

And yet, it is exactly these sorts of major market falls that almost all investors fear the most.

Despite their demonstrably temporary nature. (In fact, investors fear these events so much, and they become so rattled by them, that they invariably capitulate and sell their shares close to the very depth of these events - the exact opposite of what it has been proven time and time again that they should have been doing.)

But if the definition of a black swan event is something that brings about permanent destruction of one's capital (which is what I understand it to be), then these sorts of events, traumatic though they may feel at the time of their manifestation, are not black swan events at all.

Instead, what is a black swan event is something that affects - structurally and beyond repair - the business model of an enterprise in such a way that the underlying fundamental value suffers permanent impairment. And invariably that impairment is not only a isolated event, but is ongoing.

Contemporary examples of these sorts of black swan events - by my reasoning - are how the advent of online shopping has brought about the demise of the department store concept as the default retail distribution model for apparel or luxury goods, or how print media had been displaced by the myriad of digital media delivery mechanisms.

Where I am going with this is to try and understand more about your view below:

Timing the market

Yes, I tend to accumulate cash. Unfortunately, at the last great opportunity, the GFC, I didn't buy aggressively enough. It's easy to say, I price rather than time, but the reality is, that when all starts getting gloomy, its funny how ones valuations start getting lower, and lower. What can I say, just groping in the dark, and hoping that the unwinding of the super cycle really happens.


When you refer to the super cycle, I am assuming you refer to the current market conditions, with valuation multiples that have been well above historical averages for some years (ostensibly due to the artificially low relative value offered by alternative asset classes)?

In hoping for the super cycle to unwind, are you not concerned about the opportunity cost of waiting for it, a cost which increases the longer the cycle remains intact (and in defiance of the gravity that deep value investors perceive)?

My own experience of waiting for markets to falls so that I can buy has been that they go up from point A to point B while I'm waiting, and then when they do finally crack, the ensuing correction leaves share prices at point somewhere between A and B (and closer to B than A the longer it takes for the correction to occur), and I had foregone all the cumulative dividends in the interim, meaning that I would simply have been better off just closing my eyes, gritting my teeth, and remained fully invested all the time.

Related to this, you may have heard the very Buffet-esque platitudes of:

"It is better to buy a good business at a fair valuation than a poor quality business at a cheap valuation"?

and

"The longer a stock is held, the less relevant the entry price is for the overall total return."


How do you think about these things?

The reason I ask is for no reason other than edification; for I happen to be holding more cash than I have done for a long time (15% of my total capital, as well as a further 10% in a market neutral long-short fund, meaning 25% of my capital is currently uncorrelated to the stock market.)

While this "feels" right to me (if not a bit lazy and under-invested) at this stage of my life, and given my perception of the sort of value on offer from listed securities at present (or lack thereof), I am always interested in gauging how others approach this issue.