Phil Town got this comment on the blog recently, and wanted to make a response:
I missed most of the last 5 year bull run because I have been waiting (and waiting ...) for the Big Correction to come. By ignoring the Rule # 1 indicators (which will still say BUY from time to time), couldn't I just be setting myself up for missing another 5 years of possible growth ... ?
Keep in mind that we are not so good at predicting the market as a whole. When I talk about the market at a 10 PE, I only mean that it gets there from time to time and it's way overdue.
HOW it gets there is another story altogether. It may not "correct" itself at all and still end up with a 10 PE, simply by not going up even while the S&P 500 companies continue to increase earnings.
On the other hand, we are pretty decent at picking businesses out of the pile that are great businesses that we can buy at a great price.
This, to a degree, is market dependent in the sense that our partner, Mr. Market, is well-known to us to be Bi-Polar and, therefore, almost certain to slip regularly into an emotional state of euphoria or deep depression. And we react accordingly by selling into the euphoric state and buying when he's most depressed.
This is our general strategy.
Still, we know that Mr. Market is just as capable of getting euphoric or depressed about a specific business as about the market as a whole. Certainly, our dear partner is more susceptible to being depressed about a specific great business when he's depressed in general, but it isn't out of the question that he can be depressed about a great business even while being euphoric in general.
In fact, that happens quite a lot and causes us to pay attention to the specific industries within the market.
Mr. Market might be entirely depressed about tech stocks even while being euphoric about banking stocks, for example. The result of this is that we, as Rule #1 investors, can expect that there are more great businesses for sale in a depressed market than in an euphoric one; and vice versa, that there are fewer great businesses on sale in a euphoric market than in a depressed one.
So, Adrian, had you been watching closely for your specific great businesses to go on sale, it is entirely possible that none of them were on sale for the last five years, or that all of them were.
Actually, it's quite likely that many of them were on sale after the Dow got to 7500, but that was before I wrote the book, and you can't be faulted for not acting when you didn't have the information.
BUT, now you do, assuming you've actually read Rule #1, and this time you'll be prepared. Don't wait for me or anyone else to tell you what to do. Learn to decide on your own based on these simple principles:
- Know your business and industry well: that means "do your homework";
- Only look at businesses that are durable and can raise prices with inflation: that means they have a big, protective, monopolistic moat;
- Only invest with people you trust and who share your values: that means, in my case, among other things, that they have a passion and a BAG;
- Only invest when you know the real value of the business as a business and then only when it's significantly on sale: which means it has a big MOS.
If you will follow these principles, it is almost certain that you will make money in the long run. In the short run, if you only do what I just said, you could own something that the market is pricing below what you paid for it. The "short run" can last years and, if you made a mistake, it can last a lifetime.
Therefore, in addition to what I said above, I use tools to get in and out with the Big Guys so that I am protected from my own ignorance. I know these tools will cost me some of my profits. I know that I will do better if I am right about the business if I do not use the tools. But I am a chicken and do not trust that I know enough to be right about the future and I, therefore, get out like a big chicken if the big guys are selling off. Thus, I do not have to ride the market down if Mr. Market gets crazy or suddenly sane and has a big sell off. If there is a big sell off, it is being done, by definition of "big", by the big guys -- and then I'm out. I encourage you guys to think similarly, even if it takes away some of the profits.
Now go play.