Share Investing - Keep In Mind
INTELLIGENT INVESTOR XII
Ben Graham taught his students a great deal of "market psychology," as he considered the "temperament" of an investor as a critical aspect of success or failure. His first lesson focused on the difference between timing and pricing.
Stock prices rise and fall, so it is human nature to look for a way to profit from such volatility. There are two possible was to do so...
Timing-- to anticipate the rise and fall of the market and of the prices of individual stocks-- to buy or hold when the they are expected to rise, and to sell or refrain from buying when they appear to be heading down.
Pricing-- to buy stocks that are priced by the market below the fair value of the underlying business and to sell, or refrain from buying when they are priced above fair value.
Graham, a time-tested veteran of the stock market, was convinced that an intelligent investor could profit from focusing on pricing. He was equally convinced that anyone with their emphasis on timing, in the sense of believing their own (or others') forecasts, would end up as a speculator and be doomed to poor financial results over time. Despite the wisdom of such convictions, Graham also understood most would not listen... "As a matter of business practice, or perhaps of thoroughgoing conviction, the stock brokers and the investment services seem wedded to the principle that both investors and speculators in common stocks should devote careful attention to market forecasts."
This is certainly my observation yet today right here in the Singapore market. For example, I received the following e-mail from SIAS Research on 25 May 2006...
Celestial Nutrifoods-- Strategy: Trading Buy. Target: $1.60. This target is projected from the 61.8% retracement of the decline from $1.77 to $1.31. Stop loss below $1.30. While the trend for Celestial Nutrifoods is not attractive at all, the buying interests at its 38.2% golden ratio based on historical high ($2.10) and low ($0.18) seems to be high. Celestial Nutrifoods maybe due for a rebound if $1.37 manages to hold. The traded volume for the past few days remains high, we did not see this phenomenon when Celestial Nutrifoods approached the support at $1.61. If this situation continues for the next few days, it may invalidate the potential bearish flag formation. The traded volume of a bear flag should diminish as the formation matures, strong volume should not take place in a flag formation.
Well... one can picture Ben Graham rolling with laughter in his grave upon reading this, eh? Certainly this analyst can find wiggle room enough to say he was "right" no matter where the price of Celestial heads next. (For the record, after this "trading buy" recommendation, Celestial opened the next morning down 9c to $1.28, closed down 15c at $1.22... thus assuring a sure loss in a single day if one implemented the noted "stop loss" out.) Without the slightest apparent interest in Celestial's underlying business performance or promise, its balance sheet strength, management competence, or any interest in the Chinese soybean product industry, this analyst is content to burry his head in the mystical and magical price chart patterns in search of his fortunes.
Graham chided, "The farther one gets from Wall Street, the more skepticism one will find, we believe, as to the pretensions of stock-market forecasting or timing." With new predictions issued every day, one could hardly take them all seriously. Yet many people do pick and choose among the plethora of forecasts and act on them with their hard-earned money. Graham issued the following "logic warning" to those sheep...
If you, the reader, expect to get rich over the years by following some system of leadership in market forecasting, you must be expecting to try to do what countless others are aiming at, and to be able to do it better than your numerous competitors in the market. There is no basis either in logic or in experience for assuming that any typical or average investor can anticipate market movements more successfully than the general public, of which he is himself a part.
Graham further notes that the aspect of "timing" is of great psychological importance to the speculator because he wants to make his profit as fast as possible. The idea of waiting a year before his stock moves up is unthinkable. But a one-year waiting period for a business-focused investor is of no consequence. What this means is that timing is of no real value to the investor unless it coincides with pricing-- that is, unless it enables him to repurchase his shares at substantially under his previous selling price. For an investor, one that purchases only a sound business below its fair value, a further fall would not indicate need to secure a sure loss (stop loss, in timing lingo), but indicate an opportunity to increase his stake at a now even more attractive value (averaging down, in investor lingo).
Ben Graham doubted that any serious investor was likely to believe that day-to-day or even month-to-month fluctuations in the stock market would make him richer or poorer. But what about longer-term and wider changes over a period of years as the market rolls through bear and bull cycles? Once again, after looking at a great deal of market data and considering various formula approaches to buying and selling into cycles, Graham concluded that even long-term timing was unlikely to be profitable, at least not more profitable than simply buying and holding right through the ups and downs.
Business Valuations vs Stock-Market Valuations
The impact of market fluctuations upon the investor's true situation may be considered also from the standpoint of the shareholder as the part owner of various businesses. The holder of marketable shares actually has a double status, and with it the privilege of taking advantage of either at his choice. On the one hand his position is analogous to that of a minority shareholder or silent partner in a private business. Here his results are entirely dependent on the profits of the enterprise or on a change in the underlying value of its assets. He would usually determine the value of such a private-business interest by calculating his share of the net worth as shown in the most recent balance sheet. On the other hand, the common-stock investor holds a piece of paper, an engraved stock certificate (digital today), which can be sold in a matter of minutes at a price which varies from moment to moment-- when the market is open, that is-- and often is far removed from the balance sheet value.
The development of the stock market has made the typical investor more dependent on the course of price quotations and less free than formerly to consider himself merely a business owner. The reason is that the successful enterprises in which he is likely to concentrate his holdings sell almost constantly at prices well above their net asset value. In paying these market premiums the investor gives precious hostage to fortune, for he must depend on the stock market itself to validate his commitments.
This is a factor or prime importance in present-day investing, and it has received less attention than it deserves. The whole structure of stock-market quotations contains a built-in contradiction. The better a company's record and prospects, the less relationship the price of its shares will have to their book value. But the greater the premium above book value, the less certain the basis of determining its intrinsic value-- i.e., the more this "value" will depend on the changing moods and measurements of the stock market. Thus we reach the final paradox, that the more successful the company, the greater are likely to be the fluctuations in the price of its shares. This really means that, in a very real sense, the better the quality of a common stock, the more speculative it is likely to be-- at least as compared with the unspectacular middle-grade issues.
But not this important fact, says Graham: The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgment.
Incidentally, a widespread situation of this kind actually existed during the dark depression days of 1931-1933. There was then a psychological advantage in owning business interests that had no quoted market. For example, people who owned first mortgages on real estate that continued to pay interest were able to tell themselves that their investments had kept their full value, there being no market quotations to indicate otherwise. On the other hand, many listed corporation bonds of even better quality and greater underlying strength suffered severe shrinkages in their market quotations, thus making their owners believe they were growing distinctly poorer. In reality the owners were better off with the listed securities, despite the low prices of these. For if they had wanted to, or were compelled to, they could at least have sold the issues-- possibly to exchange them for even better bargains. Or they could just as logically have ignored the market's action as temporary and basically meaningless. But it is self-deception to tell yourself that you have suffered no shrinkage in value merely because your securities have no quoted market at all.
Andrew Beyer, columnist for the Washington Post and author of several books on thoroughbred racing, has spent many years watching racegoers bet and has seen far too many lose money through impetuosity. At the track, as elsewhere, the casino mentality-- the itch to get into the action: to put down the money, toss the dice, pull the lever, do something-- compels people to bet foolishly, without taking the time to think through what they are doing.
Andrew Beyer, columnist for the Washington Post and author of several books on thoroughbred racing, has spent many years watching racegoers bet and has seen far too many lose money through impetuosity. At the track, as elsewhere, the casino mentality-- the itch to get into the action: to put down the money, toss the dice, pull the lever, do something-- compels people to bet foolishly, without taking the time to think through what they are doing.
Ben Graham taught his students a great deal of "market psychology," as he considered the "temperament" of an investor as a critical aspect of success or failure. His first lesson focused on the difference between timing and pricing.
Stock prices rise and fall, so it is human nature to look for a way to profit from such volatility. There are two possible was to do so...
Timing-- to anticipate the rise and fall of the market and of the prices of individual stocks-- to buy or hold when the they are expected to rise, and to sell or refrain from buying when they appear to be heading down.
Pricing-- to buy stocks that are priced by the market below the fair value of the underlying business and to sell, or refrain from buying when they are priced above fair value.
Graham, a time-tested veteran of the stock market, was convinced that an intelligent investor could profit from focusing on pricing. He was equally convinced that anyone with their emphasis on timing, in the sense of believing their own (or others') forecasts, would end up as a speculator and be doomed to poor financial results over time. Despite the wisdom of such convictions, Graham also understood most would not listen... "As a matter of business practice, or perhaps of thoroughgoing conviction, the stock brokers and the investment services seem wedded to the principle that both investors and speculators in common stocks should devote careful attention to market forecasts."
This is certainly my observation yet today right here in the Singapore market. For example, I received the following e-mail from SIAS Research on 25 May 2006...
Celestial Nutrifoods-- Strategy: Trading Buy. Target: $1.60. This target is projected from the 61.8% retracement of the decline from $1.77 to $1.31. Stop loss below $1.30. While the trend for Celestial Nutrifoods is not attractive at all, the buying interests at its 38.2% golden ratio based on historical high ($2.10) and low ($0.18) seems to be high. Celestial Nutrifoods maybe due for a rebound if $1.37 manages to hold. The traded volume for the past few days remains high, we did not see this phenomenon when Celestial Nutrifoods approached the support at $1.61. If this situation continues for the next few days, it may invalidate the potential bearish flag formation. The traded volume of a bear flag should diminish as the formation matures, strong volume should not take place in a flag formation.
Well... one can picture Ben Graham rolling with laughter in his grave upon reading this, eh? Certainly this analyst can find wiggle room enough to say he was "right" no matter where the price of Celestial heads next. (For the record, after this "trading buy" recommendation, Celestial opened the next morning down 9c to $1.28, closed down 15c at $1.22... thus assuring a sure loss in a single day if one implemented the noted "stop loss" out.) Without the slightest apparent interest in Celestial's underlying business performance or promise, its balance sheet strength, management competence, or any interest in the Chinese soybean product industry, this analyst is content to burry his head in the mystical and magical price chart patterns in search of his fortunes.
Graham chided, "The farther one gets from Wall Street, the more skepticism one will find, we believe, as to the pretensions of stock-market forecasting or timing." With new predictions issued every day, one could hardly take them all seriously. Yet many people do pick and choose among the plethora of forecasts and act on them with their hard-earned money. Graham issued the following "logic warning" to those sheep...
If you, the reader, expect to get rich over the years by following some system of leadership in market forecasting, you must be expecting to try to do what countless others are aiming at, and to be able to do it better than your numerous competitors in the market. There is no basis either in logic or in experience for assuming that any typical or average investor can anticipate market movements more successfully than the general public, of which he is himself a part.
Graham further notes that the aspect of "timing" is of great psychological importance to the speculator because he wants to make his profit as fast as possible. The idea of waiting a year before his stock moves up is unthinkable. But a one-year waiting period for a business-focused investor is of no consequence. What this means is that timing is of no real value to the investor unless it coincides with pricing-- that is, unless it enables him to repurchase his shares at substantially under his previous selling price. For an investor, one that purchases only a sound business below its fair value, a further fall would not indicate need to secure a sure loss (stop loss, in timing lingo), but indicate an opportunity to increase his stake at a now even more attractive value (averaging down, in investor lingo).
Ben Graham doubted that any serious investor was likely to believe that day-to-day or even month-to-month fluctuations in the stock market would make him richer or poorer. But what about longer-term and wider changes over a period of years as the market rolls through bear and bull cycles? Once again, after looking at a great deal of market data and considering various formula approaches to buying and selling into cycles, Graham concluded that even long-term timing was unlikely to be profitable, at least not more profitable than simply buying and holding right through the ups and downs.
Business Valuations vs Stock-Market Valuations
The impact of market fluctuations upon the investor's true situation may be considered also from the standpoint of the shareholder as the part owner of various businesses. The holder of marketable shares actually has a double status, and with it the privilege of taking advantage of either at his choice. On the one hand his position is analogous to that of a minority shareholder or silent partner in a private business. Here his results are entirely dependent on the profits of the enterprise or on a change in the underlying value of its assets. He would usually determine the value of such a private-business interest by calculating his share of the net worth as shown in the most recent balance sheet. On the other hand, the common-stock investor holds a piece of paper, an engraved stock certificate (digital today), which can be sold in a matter of minutes at a price which varies from moment to moment-- when the market is open, that is-- and often is far removed from the balance sheet value.
The development of the stock market has made the typical investor more dependent on the course of price quotations and less free than formerly to consider himself merely a business owner. The reason is that the successful enterprises in which he is likely to concentrate his holdings sell almost constantly at prices well above their net asset value. In paying these market premiums the investor gives precious hostage to fortune, for he must depend on the stock market itself to validate his commitments.
This is a factor or prime importance in present-day investing, and it has received less attention than it deserves. The whole structure of stock-market quotations contains a built-in contradiction. The better a company's record and prospects, the less relationship the price of its shares will have to their book value. But the greater the premium above book value, the less certain the basis of determining its intrinsic value-- i.e., the more this "value" will depend on the changing moods and measurements of the stock market. Thus we reach the final paradox, that the more successful the company, the greater are likely to be the fluctuations in the price of its shares. This really means that, in a very real sense, the better the quality of a common stock, the more speculative it is likely to be-- at least as compared with the unspectacular middle-grade issues.
But not this important fact, says Graham: The true investor scarcely ever is forced to sell his shares, and at all other times he is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits his book, and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines in his holdings is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if his stocks had no market quotation at all, for he would then be spared the mental anguish caused him by other persons' mistakes of judgment.
Incidentally, a widespread situation of this kind actually existed during the dark depression days of 1931-1933. There was then a psychological advantage in owning business interests that had no quoted market. For example, people who owned first mortgages on real estate that continued to pay interest were able to tell themselves that their investments had kept their full value, there being no market quotations to indicate otherwise. On the other hand, many listed corporation bonds of even better quality and greater underlying strength suffered severe shrinkages in their market quotations, thus making their owners believe they were growing distinctly poorer. In reality the owners were better off with the listed securities, despite the low prices of these. For if they had wanted to, or were compelled to, they could at least have sold the issues-- possibly to exchange them for even better bargains. Or they could just as logically have ignored the market's action as temporary and basically meaningless. But it is self-deception to tell yourself that you have suffered no shrinkage in value merely because your securities have no quoted market at all.
Andrew Beyer, columnist for the Washington Post and author of several books on thoroughbred racing, has spent many years watching racegoers bet and has seen far too many lose money through impetuosity. At the track, as elsewhere, the casino mentality-- the itch to get into the action: to put down the money, toss the dice, pull the lever, do something-- compels people to bet foolishly, without taking the time to think through what they are doing.
Andrew Beyer, columnist for the Washington Post and author of several books on thoroughbred racing, has spent many years watching racegoers bet and has seen far too many lose money through impetuosity. At the track, as elsewhere, the casino mentality-- the itch to get into the action: to put down the money, toss the dice, pull the lever, do something-- compels people to bet foolishly, without taking the time to think through what they are doing.
posted by Shelton D'Cruz at 2:31 AM
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