Monday, May 13, 2013

When to Fold 'em

This week's Hussman,

"[E]ven a run-of-the-mill bear market decline wipes out more than half of the preceding bull market advance. I doubt that the present instance will be different. Indeed, cyclical bear market declines that occur in the context of secular bear markets average a market loss of about 39%, wiping out about 80% of the prior bull market advance. We presently estimate a nominal total return for the S&P 500 of just 3.2% annually over the coming decade. It is not pessimism, but optimism – and optimism born of a century of evidence – that we expect stocks to provide more favorable opportunities for investment over the completion of this cycle."
I was noticing how Longleaf Partners gave back all of their gains from 2000-2007 - and then some! - in a period of about a year. I use them as an example because they are relatively smart - one of the largest holders of Chesapeake, for example.

But doesn't matter how good your security selection is if you refuse to go to cash at opportune times (and are managing billions). The small investor (AUM<$100MM) has the ability to make more market agnostic investments, and to hold large amounts of cash for extended periods of time.


matjone said...

I saw an interview a while back where Walter Schloss said he had been fully invested his whole career. I believe he did about 20% per year for about 4 decades and I don't think he was ever down more than 10%. So he wasn't giving back his gains during declines. On the other hand he also closed down his partnership during the super bubble back in the late 90's because he couldn't find any bargains.

CP said...

That is a fair point.

On the other hand, you could not now be fully invested in net nets.

I met a fellow running a fund that sells put options on blue chip stocks (!).

He was a day in, day out seller of puts.

I think for that strategy to actually work, you would probably be going in and selling puts a couple times a year into volatility spikes. Even then...