This article is authored by MOI Global instructor Gary Mishuris, Chief Investment Officer of Silver Ring Value Partners, based in Boston.
In the article, Gary answers the investor question, “Why hold any cash in the portfolio when you can invest it and then sell those investments when you find more attractive opportunities? Are you implicitly waiting for a broad market selloff to present you with sufficiently attractive opportunities in managing the portfolio in this way?”
I am not waiting for a broad market selloff to deploy capital. That would be top-down market timing, something that I have no competence in and also something that few have succeeded in. I am waiting for individual company-specific mispricings for companies of sufficient quality that I understand well. What could provide such opportunities? Typically it is one or more of: short-term disappointing results, neglect, forced selling or the market misunderstanding the implication of business developments on long-term intrinsic value. It is true that it would be helpful if the market environment were more balanced between greed and fear rather than skewed towards greed as it is now. However, that doesn’t mean that I need a broad sell-off, just an environment that is less skewed towards pervasive optimism.
The second question is why not deploy the capital in stocks in the meantime that are fairly valued or just slightly undervalued, and then sell them when the opportunities that I am searching for manifest themselves? The reason I don’t do that is two-fold. First of all, buying companies without sufficient margin of safety can lead to significant permanent capital impairment. My approach intentionally accepts that in order to minimize the chances of significant permanent capital loss I need to give up some upside. I believe this is a better risk/reward proposition than aiming for maximum returns possible and exposing our capital to a significant chance of loss.
Second, while I have no reason to believe that the placeholder investments are correlated with potential future opportunities, I simply have no idea where the prices of long-term investments will be in the short-term. So to rely on being able to liquidate these purchases at good prices in order to redeploy that capital into opportunities that become available would be speculative. One of my competitive advantages is my long-term time horizon, which allows me to never be a forced seller of securities, and on the contrary to take advantage of irrational forced selling of others. If I were to change my approach to be fully invested even in the absence of sufficiently attractive opportunities, I would not only be imperiling our capital but also putting myself in a position where my ability to execute my strategy will be at the mercy of short-term market movements.
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