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Monday, August 13, 2007

thoughts for today

If you look at stock message boards, whenever a stock is going up, no one ever blames it on manipulation or senseless panic buying or conspiracy theories. It's always for good solid reasons. When a stock drops a great deal, that's when you start hearing the most bizarre explanations for things. Easy phony answers.

Is it bad to buy a stock for a good price only to be offered a better price later on? If the stock is worth a lot and it will eventually reach that price, why does it matter what happens in the meantime? with the exception that your choices are more limited while the stock is down (ironically because it becomes an even better investment going forward and would require an even better choice to replace it). I've been lazy lately with investment work and the falling prices of a number of stocks just makes it easier to be lazy. I'm very unlikely to find something better than CXTI at $2.66 or Strathmore at $2.17. It would be nice if CVU went to full value after reporting fairly good results. But that doesn't seem to be happening.

People say they can predict short term price changes, but I see a lot of them ending up wrong. Maybe some people are successful, I don't know.

I hear that there's a lot of disruptions going on in the hedge fund world right now. Managers are shedding risk, unwinding positions. Things that were never supposed to happen actually did happen (like they do every 10 years or so).

But I believe that's all noise.

UPDATE next day:
What an odd day for CXTI. They announce they'll file late and the stock price stops dropping and climbs 25%. I bought more shares in the morning just after the open, around $2.55.

Comments:
I've struggled with the same sorts of issues when describing value investing to the modern finance crowd (ie volatility = risk). The best that I could come up with is path independence in favor of longer term correctness. If fundamentals dictate an intrinsic value of X, it doesn't really matter how the price goes from 1/2 X to X. On the other hand, modern finance is focused heavily on that path.

There are a few situations where path dependence is hugely important such as leverage. A price going from 1/2 X to 1/4 X does matter if it forces you to answer margin calls or close shop. You could eventually be right, but are being forced to artificially exit your positions. I'm guessing that's the reason why a lot of quant shops are getting hurt.
 
d le,

I totally agree with all of that. Thankfully I don't deal with finance people, so I don't have anyone telling me about risk=volatility.

It seems far easier and more reliable to predict that it will be cold in January and hot in July than trying to predict next week's weather. But this requires sitting through long stretches of time when the weather "goes the wrong way" and you wonder if you might be wrong because it's November and still not cold yet. Or else immediately after betting on cold, the weather got substantially warmer.

I think the concern with short-term volatility removes focus from the more important issues of 1) overvaluation errors larger than the margin of safety and 2) the bigger picture which might have huge potential gains that dwarf the short term fluctuations.
 
The point about leverage is definitely true. I'm sure glad I don't use leverage, except in extremely limited ways for short time periods (now is not one of them).

In addition to leverage, if the company needs to raise cash, then a low stock price can be harmful (that may apply to CXTI). Another potential problem I've seen is when a company gets bought out when the price is particularly low and shareholders accept a slightly higher price.
 
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