BLASH ... Buy Low And Sell High
Buy Low
The secret to the stock market is to buy a stock that is going to go up in price.
If it does not go up, do not buy it.
Sell High
The secret to the stock market is not only when to buy but also when to sell.
If a stock is going down - sell it.
Buy Low And Sell High
Have you ever heard that one? Everybody knows that you need to buy low and sell high (BLASH).
By following this simple rule, you can always make money.
To be a successful investor, you only need two things:
(1) the conscious decision to buy low and sell high ... and
(2) the desire to monitor your stocks on a nightly basis
Yet, most investors do not have either of these. They are not willing to commit the 15- to 30- minutes each night,
and they always follow a different rule: buy high and hope to sell higher! (BHAHTSH) ... not as nice of an acronym!
The much greater popularity of this alternative rule is a reality in the marketplace,
and we believe that the evidence of this is clear.
Past Proof
Warren Buffett pointed out the extreme lack of correlation between the growth of our country over the last 100 years
and the returns of the stock market. While the stock market makes many dramatic moves, both up and down, the economy
as measured by GNP (gross national product), grows at a relatively steady pace. During the last century, there were
three huge bull markets spanning 44 years, and there were three periods of stagnation covering 56 years
when stocks were actually down.
Why do we experience so many quick, extreme moves in the market when the changes taking place in the underlying economy
are not that quick or that extreme?
We have two reasons. First, consider the significant changes that have taken place in interest rates.
As we have noted in the past, the intrinsic value of a company is always the net present value of the future cash flows
that the company is able to generate. If long-term interest rates are high, the present value is much lower
than at a time when interest rates are low. So, when rates were much higher in the early 1980s, the intrinsic value of a
company was significantly less than it is now, a time when long-term rates are relatively low.
The second reason for having these wild stock market swings is less quantitative but just as real, the predictable behavior
of the average investor is to buy high and
hope to sell higher. Stock market investors always seem to assume that
whatever happened in the recent past will continue, getting even better (greed) or even worse (fear). This behavior results
in accelerated buying at market tops (buying high) and accelerated selling at market bottoms (selling low), further amplifying the
irrational highs (2000) and lows (1982). The catchword for this behavior is overreaction.
Professional Proof
The market masses cannot figure out how to BLASH, but certainly the professionals must know how to do this ... ??
Our experience suggests that even professionals do not come close to following the simple BLASH rule, no more so
than the man on the street.
If there were a single contra-indicator that we would use, it would be to do exactly the opposite of whatever is
currently being done by the consensus of all institutional funds.
In the late 1970s and early 1980s, fund managers were abandoning stocks and investing in tangible assets,
like real estate, oil, and gas. These years were at the peak of inflation, and tangible assets were way up.
Clearly, fund managers were buying tangible assets at a time when these professionals thought the assets would
go higher (HOPE). Stocks were very cheap, having gone nowhere since 1966. The market was being priced extremely low,
less than ten times earnings, and these fund managers were assuming that the market would go even lower.
They had observed what had happened in the recent past, and they assumed that the markets would continue to do the same
in the future.
With any market extremes ... the oil bubble, portfolio insurance, the international Japan bubble, the technology bubble, ...
you will find a certain behavior with professionals. Even recently, we have seen it with their poor timing in flocking
to venture capital investments and their latest rage, hedge funds that have not yet imploded.
Not only are these professionals unable to avoid the herd mentality, but they are the herd.
Again, BLASH is a behavior often preached but seldom practiced, even by professionals.
Present-day Proof
What does it take to BLASH?
The correct BLASH behavior is perfectly clear, in hindsight! Not only is history clear, it is somewhat repetitive.
Each repetition is sufficiently different to allow for a
this time it is different theme to emerge.
But, the characteristics of those repeating cycles are generally the same.
Then, why do investors not learn?
Quite simply, to BLASH consistently requires an abnormal, counterintuitive, discomforting behavior.
You must be a contrarian. The world is fortunate that most people are not contrarian by nature.
People are more comfortable doing whatever others are doing. The more other people come to your same decision,
the more this confirms your decision. The thought process is that people would not make a decision if they did not think
they would win, and if they lose, it is much more comforting to lose among friends and respected peers than by themselves.
So it should be easy to identify the "present-day proof" correctly for our theory that investors as a group do not follow
the BLASH rule. We will show this by identifying the stocks that investors are most comfortable buying today, and you can
assess for yourself whether those securities are "low".
Index Funds
Any good investment idea can be destroyed by over popularity.
Portfolio insurance in 1987 was a good example. As with most examples, the star quickly rises and falls within a few years.
(for example: nifty-fifty, oil bubble, technology bubble)
However, with index investing, the cycle from infancy to a market extreme has spanned two decades rather than a few years.
The popularity of indexing began to build slowly in the early 1980s, and it has risen steadily over the last two decades.
It has grown from almost nothing to over 40% of the assets invested in the S&P 500 Index. Once again, similarly to the
portfolio insurance problem, the popularity of capitalization-weighted, index investing among the investment professionals
is one of the principal causes for the market valuation problem of today.
However, over the last five years, the S&P 500 has declined 14%.
(Imagine if you would have bought and held an Index Fund during that time!)
We believe that this particular cycle peaked in 1999/2000 and that the downside of this cycle will create
a problem for the larger capitalization stocks for years to come (see below).
Mega-Cap Stocks
The index-investing problem noted above has created a new nifty-fifty problem.
When you make an investment, you are making an asset allocation decision.
Investors and markets are better served when assets are allocated to the most productive businesses.
With index investing, assets are allocated to the largest businesses, not the most productive.
The larger businesses get even larger, and, as they receive this
easy money,
the companies probably become even less productive.
A Technology Recovery
Investors still appear somewhat comfortable buying technology stocks. The prevailing belief is that the original
concept for buying tech stocks was good, and because they have dropped so far, now must be a good time to buy.
While we like stocks that have been beaten down, we do not share that level of comfort with this sector.
At their peak in 1980, oil stocks were 35% of the S&P 500. They are now around 6%.
It took over a decade for total belief in the original concept to fully dissipate. At their peak in early 2000,
technology and telecommunications were over 40% of the S&P 500. They are now around 22%. Most of those stocks continue
to have little or no earnings, so their price/earnings ratios are still in the triple-digit range. Any comfort
with investing in this sector probably continues to be misplaced.
