Too often analysts write reports that call out market tops saying that stocks are “overvalued” and that markets are “frothy”. Unfortunately, they are rarely correct and cause anxiety for investors with any sort of market exposure. In reality, it is very difficult (basically impossible) to consistently predict market tops or market bottoms as both are driven by the bulk of institutions either simultaneously entering or exiting the market. This is why we stress the importance of having a discipline where one can exit to protect his/her capital and more importantly gains when markets falter. This has to be based on what is actually happening in the market and not in the economy or China or Europe or… etc. A wise John Keynes once said, “Markets can remain irrational for longer than you can remain solvent”.
Everyone is guilty of making mistakes while investing. It’s inevitable as it is in our natural behavior to succumb to biases that affect our decision-making. However, it is critical that one learns from past mistakes by analyzing where one went wrong and documenting what happened. To gain an edge one should also study other successful professionals to learn from their mistakes. Unfortunately sometimes one has to feel the pain behind a mistake to learn from it. The legendary trader Jesse Livermore couldn’t have explained it better with the following quote: “Whenever I have lost money in the stock market I have always considered that I have learned something; that if I have lost money I have gained experience, so that the money really went for a tuition fee. A man has to have experience and he has to pay for it.”
When a client brings on new capital, many managers put the pedal to the metal and invest all of the funds immediately regardless of the state of the market. This is because they are buy-and-hold investors that believe these investments will eventually reach their true value over the long-term. While investments do usually trade towards their intrinsic value, they also undergo volatile periods where market pressures force a stock to go either far above or below this intrinsic value due to fear and greed. We at Friesen Capital Management rather believe that timing of entry & exit into the market are crucial to one’s success.