Perspective on Getting It Right

It really irritates me when I see talking heads crowing about their one prediction that came to fruition. Congratulations… now how about the dozen proclamations you whiffed on? We see this across numerous platforms, ranging from CNBC (finance) to ESPN (sports) to CNN/MSNBC/Fox News (politics), and to radio (all of the above).

As I tried to explain in my last post, making predictions should be challenging! The more consequential the prediction, the more variables to consider, and thus the greater margin for error. What annoys me so much is the aforementioned talking heads throwing around forecasts without much care as to whether or not they have merit.

On this blog, I try to mention the times that I’ve screwed up just as much – if not more – as the times I’ve been right (for proof, see here, here, or even the image at the top of this page!). This isn’t just for some moral crusade… I learn far more from my failures than from my successes.

A month ago I wrote a post entitled “Trouble Ahead for the Nasdaq.” Obviously you can read it in full to get more details, but essentially I wrote that the Nasdaq (in particular, relative to the DJIA and the S&P 500) was primed for a fall due to overextended valuations driving its superior gains. I specifically mentioned Netflix, Facebook, Amazon, and Tesla as notable companies that were trading at ridiculously high levels – and that they were due for a fall. Since I published that post, here’s what has transpired:

4.18.14 NSDQ last month

Okay, I was right. I f^%#@&! nailed it! Now what?

Rather than basking in my own brilliance, it’s important to recognize a few things. First, my timing was undoubtedly fortuitous. Frequently a great investing idea can take months or even years to bear fruit… but sometimes lady luck is on your side, and Mr. Market rapidly swings your way. Second, concluding that the Nasdaq was due for a fall was possible by anyone willing to take the time to analyze historical valuations, and not to get swept up in the irrational exuberance fueling these tech stocks’ absurdly high price levels.

The third and final thing to realize is far important than who predicted what when. The market’s recent movements have given investors a little – and I mean, little – breathing room to find some bargains. This is not 2011, and certainly not 2009. Bargains are not growing on trees. But there are some… for those who like the Netflix’s future prospects, for example, you can buy it for 20% less today than you could last month.

Unfortunately for value investors with free cash on hand, the S&P 500 is down a mere 0.15% over the timespan of the above chart. In other words, the last month has created buying opportunities for Nasdaq stocks (such as tech companies) rather than those included in the S&P 500, which of course contains more of the companies that disciples of Buffett and Graham typically chase. This presents an interesting conundrum: should we seek out value in companies that the market has recently frowned on, even if these companies are not the usual modus operandi?

The answer to this question strikes at the heart of value investing. Due in no small part to Warren Buffett’s personal bias, modern value investors are notorious for avoiding technology stocks. Going back to Benjamin Graham, however, is the notion that almost any investment can be made, so long as the price is right. In my opinion, this rule takes precedence in making investment decisions.

I’m not rushing to buy Netflix, Facebook, Amazon, Tesla, or other similar companies. Should companies on the Nasdaq continue to fall (and rest of the market continue to stand pat), I will look more seriously as finding one or two tech stocks that I feel Mr. Market is unfairly punishing. As of now, however, I’m lying in wait. I wouldn’t be surprised if there’s more room to fall, and as I learned in 2009, it’s dangerous to catch a falling knife. No matter what predictions I get right, after all, they’re not much use if I don’t also learn from my mistakes!


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