The Problems With ‘Waiting To Buy’

Waiting to Buy by David Merkel, CFA of AlephBlog

Investment department of a number of life insurers, every now and then I would hear one of the portfolio managers say, “We know that the rating agencies are going to downgrade the bonds of XYZ Corp, but we like the story.  We’re just waiting until after the downgrade, and then we will buy, because they will be cheaper then.”

And, sometimes it would work.  Other times, nothing would happen at the downgrade, and they would buy at the same price.  But more interesting and frequent were the times when the bonds would rally after the downgrade, which would make the portfolio managers wince and say, “Guess everyone else was waiting to buy also.”

Now, there was a point in time where the corporate bond market was more strictly segmented, and getting downgraded, if was severe enough, would mean there was a class of holders that would become forced sellers, and thus it paid to wait for downgrades.  But as with many market inefficiencies, a combination of specialists focusing on the inefficiency and greater flexibility on the part of former forced sellers made it disappear, or at least, make it unpredictable.

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But so what?  Bonds are dull, right?  Well, no, but most think so.  What about stocks?  What if you want to buy a stock that you think is going to rise, but you are waiting for a pullback in order to buy?

In order to to get this one right, you have to get multiple things right:

  • The stock is a good buy long term, and not enough parties know it
  • The stock is short-term overbought by flexible money
  • Other longer-term buyers aren’t willing to buy it at the current level and down to the level where you would like to buy.
  • The correction doesn’t make quantitative managers panic, sell, and the price overshoots your level.

Maybe the last one isn’t so bad — no such thing as a bad trade, only an early trade, if the stock is good long term?

That’s one reason why I do two things:

  • I tend to buy the things I like now.  I don’t wait.  Timing is not a core skill of mine, or of most investors — if you are mostly right, go with it.
  • I pursue multiple ideas at the same time.  If I have multiple ideas to put new money into, the probability is greater that I get a good deal on the one that I choose.

The same idea would apply to waiting to sell.  Maybe you think it is fully valued, but will have one more good quarterly earnings number, and somehow the rest of the world doesn’t know also.

Hint: do it now.  If you are truly uncertain, do half.  It’s tough enough to get one thing right.  Getting short-term timing right verges on the impossible.  Better to act on your strongest long-term sense of value than trying to get the short-run perfect.  You will do best in the long run that way.

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David J. Merkel, CFA, FSA — 2010-present, I am working on setting up my own equity asset management shop, tentatively called Aleph Investments. It is possible that I might do a joint venture with someone else if we can do more together than separately. From 2008-2010, I was the Chief Economist and Director of Research of Finacorp Securities. I did a many things for Finacorp, mainly research and analysis on a wide variety of fixed income and equity securities, and trading strategies. Until 2007, I was a senior investment analyst at Hovde Capital, responsible for analysis and valuation of investment opportunities for the FIP funds, particularly of companies in the insurance industry. I also managed the internal profit sharing and charitable endowment monies of the firm. From 2003-2007, I was a leading commentator at the investment website RealMoney.com. Back in 2003, after several years of correspondence, James Cramer invited me to write for the site, and I wrote for RealMoney on equity and bond portfolio management, macroeconomics, derivatives, quantitative strategies, insurance issues, corporate governance, etc. My specialty is looking at the interlinkages in the markets in order to understand individual markets better. I no longer contribute to RealMoney; I scaled it back because my work duties have gotten larger, and I began this blog to develop a distinct voice with a wider distribution. After three-plus year of operation, I believe I have achieved that. Prior to joining Hovde in 2003, I managed corporate bonds for Dwight Asset Management. In 1998, I joined the Mount Washington Investment Group as the Mortgage Bond and Asset Liability manager after working with Provident Mutual, AIG and Pacific Standard Life. My background as a life actuary has given me a different perspective on investing. How do you earn money without taking undue risk? How do you convey ideas about investing while showing a proper level of uncertainty on the likelihood of success? How do the various markets fit together, telling us us a broader story than any single piece? These are the themes that I will deal with in this blog. I hold bachelor’s and master’s degrees from Johns Hopkins University. In my spare time, I take care of our eight children with my wonderful wife Ruth.