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When Should Investors Begin To Buy In A Downward Cascading Market?

investorsResearching possible speakers for Noosapalooza 2019 I came across the following question on a popular blog:

"When should investors begin to buy as the market is cascading downward?"

It was aimed at Howard Marks, the founder of behemoth asset management firm Oaktree Capital Management. Managing $100 billion, Oaktree specialises in distressed and corporate debt.

The answer from Marks was, “All you need for ultimate success in this regard is (a) an estimate of intrinsic value, (b) the emotional fortitude to persevere, and (c) eventually to have your estimate of value proved correct.

The paraphrased answer by the blogger was, " when price is below intrinsic value. And if price continues downward, buy more."

I'm not quite sure that's what Marks is saying.

I certainly can't argue with someone managing $100 billion, but I have issues with buying weakness, then continuing to buy more as the shares fall further.

This style, whilst popular due to the Buffett effect, can leave a long trail of destruction in its wake.

The following chart is one I have had saved in my archives for many years. It's the exact language used by the insurance analyst at one of Australia's brokerage houses. Just to clarify, an insurance analyst only researches insurance stocks. Nothing else. They live, eat and breathe insurance companies. They meet the management. They visit the premises. The pore over every announcement and report. They look in every nook and cranny of the company.

Sometimes they even fall in love with miss the story completely.

HIH insurance

The first issue I have with intrinsic value is that in many respects it's a discretionary calculation and therefore difficult to replicate. An old school buddy of mine is a quant analyst at one of Australia's largest investment banks. He told me that his valuation models had 12 inputs - 9 of which were forecasts about future occurrences, i.e. where the AUD will be in 12-months, or where interest rates will be next year or how consumers will react to a new product release.

A lot of moving parts.

The table below shows the current valuations^ for AMP.

amp valuations

One could take the 'consensus' view and suggest AMP is probably undervalued based on the above estimates. But as we saw with the HIH example, valuations change, and can change very quickly. The following chart^ of AMP tracks the change in consensus valuation. 


I had a good laugh yesterday after reading on Twitter that Morgan Stanley issued a '43-page in-depth research report' on Fortescue Metals. Their conclusion was a valuation of $3.30 vs current price of $3.70. 

My simplistic thoughts on AMP and FMG?

The trend is down.
When that turns up, buy.
Until then, stay out.

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