My philosophy of investing is pretty simple: Find great businesses and buy them on sale. This philosophy quite specifically does not require that I make market-wide calls. I don't need to know if I'm in a bull market or a bear market to make a decision about owning a business. The key is to know its a wonderful business - which means knowing its a durable business that is easy to understand and not dependent on massively clever people. And knowing its value as a business. Get those right and the market is pretty much irrelevant because in the long run the market is going to price that business at its value. I don't really care if the entire market is on sale or over-priced because I'm only buying a few businesses, not hundreds. All I need to care about is wonderfulness and price vs value.
That said, in the last four years I've made three public market-wide calls. The first one was on CNBC's Closing Bell in August, 2007 when I said it was time to get out and go to cash. The market was at 13100. I was early by 2.5 months. The call was based on a combination of technical signals and macro issues that included the price of companies v their value.
The second call was on March 9th - again to CNBC (and specifically to Kiplinger's editor who had publicly challenged me to tell him when to get back in 18 months earlier on CNBC). The Dow was at 6700. I said I didn't know if we were at the bottom but there were so many great companies on sale that it was time to load up the truck. My investing philosophy permits me to buy businesses and then hope the price goes down after I buy them. I call this 'stockpiling'. Its kind of like dollar cost averaging with a brain. This call was dead on the money - exactly at the bottom.
The third call was to my students on June 13th, 2011. I said it was time to get out. Again, this call was based on technical and macro signals. For about a year I've had a small group of dedicated students who've paid a hefty subscription fee to look at stock investing over my shoulder, so to speak. I do a webinar twice a week with them asking questions, doing homework and generally learning to make up their own minds. I also show them exactly what I'm buying and selling when I'm doing it. On June 13th the Dow was at 12000. I was two months early.
Yesterday the Dow hit 10,600. Today it rebounded to 11,000. So now what?
The answer partly depends on your trading skill level. I sold Puts yesterday. I may buy them back tomorrow. While that looks like a pure trade, it isn't. I sold Puts on companies on want to own at strike prices that are at or below MOS and Payback Time prices. I am happy to be Put the companies at those prices and I am happy to keep the premium that I've collected. The premiums for the Puts, by the way, were sky-high, annualizing at 50% or more. In other words, if I am excited to buy at the strike price of the Put and happy to keep the premium if I'm not put the stock, this is a no-risk trade. If the stock price goes up, its a win. If the stock price goes down, its a win. If the stock price stays the same, its a win.
So one thing to do now is to trade the massive volatility in the market. I would encourage you to get good at Rule One investing so you can do these kinds of trades when they become available.
The second thing to do is to simply buy what goes on sale. Do your own homework, do not copy me or any other guru out there because you will get burned emotionally when the stock price falls and you get scared. You have to know why you own a business so solidly that the price drops do not rattle your commitment or shake your confidence. I own several stocks that I truly hope drop another 50% in price so I can load up on them with an ever lower basis. If that isn't your level of confidence, this is not the right market for you to be buying anything in. Stick with an index long-term until you learn enough to not be dangerous. You do not want to buy XYZ corp and then see the stock price crash unless you are really solid about why XYZ is a great company and will be great (meaning it can sustain its profitability and cash flow for the next 20 years at least) for a long, long time regardless of what kind of bone-head happens to be running it.
The third thing I'm going to do now is go play. I don't know if this market is going to go rocketing up for a while. No idea. But the rating drop trigger is just one of any number of economic issues rolling down the tracks as we come toward the end-game of monetary policy. The boys in DC are almost out of gadgets, 10-year Treasuries are at 2.1%, Europe is in turmoil, London is burning. Its so mixed up, all you can do if you don't want a lot of risk is find wonderful businesses and buy them when they are cheap and don't worry too much about the rest. It too shall pass.
Now go play.
