Post of the Day
April 13, 1998
Communion of Bears Board
Subject: Re: Trend v Contrarian
you know me, i'm one of those twisted, value hunting types - i identify more with al frank, mj whitman, and graham than say richard sanborn, buffet or lynch. that's not to say that i'm hung up on buying capital assets or land in argentina. i like earnings too. happiness truly is a positive cash flow. but i like to buy em cheap. its just in my nature. but to buy cheap requires generally anti-momentum investing. buying into bad publicity. buying the dog that is down.
being contrarian just for the sake of doing things differently is actually a losing proposition. that's the tricky part. to know that polarities exist and that overdetermined obsessive behavior tends to produce a result opposite of what is intended. to move within the flow yet be able to see the unwarranted extremes and be able to take advantage of them.
when to buy? you need a reason to go against the trend, whether its a price chart or a balance sheet is a matter of personal preference.
|Be picky on the buy side, patient on the sell side. Why? Well my best investments have just turned out to be the longer holds. And there are less decisions to make. Fewer decisions - fewer chances to screw up.|
looking just at price action seems to me like your roulette wheel. i like to look beyond price action and oscillating 4th order polynomials and look for cheap cash flow and safety in the balance sheet. for me its all about price relative to cash generated. in a market dominated by the short term earnings game, there are always plenty of opportunities for the contrarian. but the best opp's take time to develop. the need to urgently load up on something just because it's 25% off its high is bull market mania. some co's never recover you know. just ask anyone who bought digital in june of '87. ibm, on the other hand, did survive and prosper. price chart analysis alone could not distinguish between the two in 1990.
when to sell? i never enter into an investment without first establishing the risk/reward scenario, i.e. before i buy i already determine when i will sell - either on the loss side or the gain side. sure, i'll update that sell target as time goes on. but this is a very important aspect of the way i do things. to always identify targets before buying. even "beat the dow" has a sell rule built in. this is probably why it back tests so well.
btw, i think its tough to be a contrarian with daily input from the wsj, cnbc and places like the MF. too easy to be swayed. too much friggin data. we are not mr spock. we are emotive. less data - fewer emotive responses, less emotion, better logic. work with only the key data that you need for your style of investing. unplug louis rukeyser. cramer is ok if you want to be entertained but other than that - yadda yadda.
on a trade by trade basis, the best thing i've done over the years is to lighten up. keep turnover low- say 25-33%. look at 3-5 year buy/sell targets . be picky on the buy side, patient on the sell side. why? well my best investments have just turned out to be the longer holds. and there are less decisions to make. fewer decisions - fewer chances to screw up. that is probably the most important lesson that i gleaned from fisher's book. fewer decisions - fewer chances to muck things up. plus less fees to the sec and to the broker.
the key question is this - do you fall asleep readily at night? if so your buy/sell decisions are probably ok.