Value-Stock-Plus

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Random Thought:

• This too, shall pass – Abraham Lincoln

What does it take to become a successful speculator? It is likely that everyone would have a different answer to this question. But, Victor Niederhoffer has a very interesting take on this. In the preface to his book, The Education of a Speculator, Niederhoffer writes, “Join me in seeing how humdrum everyday experiences, combined with the wisdom of immortals, can help you appreciate and maybe even learn the nitty-grity of buying low and selling high.”

Buying low and selling high only sounds simple. It is never simple to execute this strategy and most speculators know that. As Niederhoffer points out, “A corresponding desire to stay in the middle afflicts most speculators, myself included, in their order placement. I am too frightened to buy something in the market when it goes straight down, and too frightened to sell it when it goes straight up. But after it has retracted a good part of the move, I am all to ready.” It is comfortable to be with the herd in the middle. Niederhoffer quotes what Francis Galton wrote some centuries back: “The vast majority of persons have a natural tendency to shrink from the responsibility of standing and acting alone. They exalt the vox populi… even when they know it to be the utterance of a mob of nobodies.” More than anything else, a good speculator needs to be a lonely man.

Click here for the full story.

by Chetan Parikh – CIO

In a brilliant book “Hedge Hogging”, the author, Barton Biggs, writes about buying on the basis of value and not momentum.

“Investing on the basis of value, not price momentum, is our religion.

Warren Buffett articulated this philosophy best with his manic-partner analogy. At a talk I attended, in one of his musings, he expressed it something like this:

Suppose you are an equal partner in a good business with a manic-depressive partner named Mr. Market. From time to time, Mr. Market will only see the favorable factors affecting your business and will then become so euphoric about the prospects of the business that he will come to you and offer to buy your half at a ridiculously high price. So, of course, you should sell it to him.

At other times, seeing only trouble ahead for your firm, he becomes deeply and in his despair offers to sell you his share at an outrageous discount to its intrinsic value. Then, you should buy it from him.

Buffett went on to say that it was irrational, the height of foolishness, to sell an asset you were confident was undervalued just because its price was falling. In other words, Mr. Market can be an old fool (or maybe a young fool) who, from time to time, becomes hysterical. Sometimes, in his madness, he sees ghosts. At others, he imagines the good fairy touching him with her long golden fingers.

You are perfectly free to ignore Mr. Market or to take advantage of him, but it will be disastrous if you fall under his influence. Suppose the price you could sell your home at was quoted every day. For several months the quotation steadily declined. Would you then sell your home, the home you were comfortable in and satisfied with, just because its price was declining? Of course not! In this sense, an attractive investment is similar to a home you are happy to inhabit.

Mr. Buffett’s value philosophizing sounds eminently sensible, but it doesn’t work when you are trafficking in commodities and you have short-term-performance sensitive clients.”

Click here for the whole transcript. (Source: CIO Website)