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.
What can past market crashes teach us about the current one?
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.