I wrote this as a reply to a post on a forum, but figured it’s worth sharing here too.
There are days at which the most undervalued stocks become cheaper.
How else do you think we got to price levels like we saw last year around this time.
Irrationality can and may persist for long periods of time.
Buying undervalued, growing companies is a hedge against mostly everything. Even if they get cheaper, they’re still better than owning reasonably to overvalued companies. Also, the growth we are seeing will support the EPS in the coming years and in the long run reward those who continue to own.
That said, in times of turmoil, you have to be willing to sell stocks that haven’t gotten crushed even though they may have substantially gone down and are still undervalued in order to purchase even more undervalued companies.
I’ve been tied up in this thing called school for the last year, which hasn’t killed me mostly because there has been a strong, general trend: UP. (I called it, “against all odds.”)
Now, we are still in the glowing halo of recovery, but a lot of the recovery is priced in to the general market. Learn from Jesse Livermore. Bet the trend. As such, even though these companies are the most undervalued in the world and are worth more, rationally, you can take money off the table in the expectation that you will be able to pay less and get more in the future.
Well, that’s the game. I’m finally in a position to play it, no-limits. At this point in time, I’m still mostly all in. I had a feeling this bounce was coming, and even told a few friends the day that it was peaking that I should sell, but I was also in a state of unconscious kidney stone pain and slept through that day.
I think that the recovery won’t last for nearly as long as everyone else does. These blue skies are going to turn to thunder clouds and the black swan of the day is going to be peak oil. Until that day where the demand outpaces supply, however, there are enough ignorance-is-bliss people out there that are going to continue to power equities higher. That said, anyone discounting cash flows should consider factoring in higher oil prices to their models, and also consider the impact of these higher oil prices on the discounted cash flows of the global stock markets as well as the political implications of substantially higher prices.
But, maybe there are enough smart people out there to have put in a market top already? I dunno. I wouldn’t count on it. Common sense is fairly uncommon.