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Is Mr. Market Crazy (the sequel)

August 21, 2011

The markets are gyrating and individual investors are beginning to pull money out of the stock market and put it in fixed income securities. Does this make sense? Businesses are generally better off than they were during the financial meltdown 3 years ago. They have stronger balance sheets and earnings have rebounded from 2009 lows. Dividends have been reinstated/increased over the past two years. The S&P 500 is yielding over 2.3%. On the other hand, fixed income securities are yielding record lows. The 10 year treasury yield just yesterday fell under 2%. Why would I move funds out of equities that earn 2.3% (with a yield that hopefully grows with inflation) and put them into bonds (or worse, T-bills) earning a fixed 2% or less? To do that (and still be ‘rational’) I would have to believe that equity prices are about to collapse. Indeed, I would have to believe that equity prices in 10 years will be less than they are today. Is this possible? Yes. Is it probable? Not in my book!
I view the lateset market mini-panic as just another of Mr. Market’s manic moments. And that spells opportunity for those with a little cash to invest and the stomach to do it.

So what have I been doing with my portfolio? Something I promised myself I would never do! I did some short-term trading. Well, it wasn’t trading exactly; I purchased several stocks and then on reflection decided I shouldn’t have purchased them in the first place because they were outside my value investing parameters (not to mention that the share prices had increased over 5% in a couple of days). The first purchase was Berkshire Hathaway when it declined last week to under $67 a share. Then when it bounced to $72 two days later I was out! Berkshire is really not where my funds should be except in a placeholder sort of way. Besides, at $67 it was still trading for slightly over book value. The second was EBIX where I put a little money after reading the thread about it on the Corner of Berkshire and Fairfax discussion board. The stock hit a low of $15 and change when I hit the buy button. Of course, on reflection I realized that EBIX does not have the kind of margin of safety that I really should demand of a stock, even though I do believe this is a great growth stock story. When it rebounded to $17  the next day I was out.

These are things I really shouldn’t be doing. This time I was lucky, but it reminded me to be a bit more restrained.

I have also opened a new position since then in another security. But that is for the next post.

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2 Comments
  1. Lib permalink

    Hi. I’m curious to know what kind of margin of safety you would need to invest in EBIX? It’s growing nicely despite headwinds (would probably be impressive with tailwinds like a solid economy and a hard insurance market), has very safe recurrent revenues (network effect provides a nice moat, and it isn’t dependent on one customer or region of the world/industry), management seems very good at allocating capital and keeping expenses low, and there’s a secular trend away from paper that they’re best positioned to ride. All of that at almost single digit PE seems pretty safe to me.

    • Hi Lib,
      I didn’t mean to imply that EBIX is a bad company or even a bad investment at this price level. What I meant is that it is outside of my investing style. Ebix as a company has some great fundamentals and, I agree, the share price currently does not reflect this, but it doesn’t have the kind of ‘balance sheet’ margin of safety that I look for; I like to see the market price below tangible asset value, which is not the case here. Everybody has a different style; mine just happens to focus on the balance sheet. If I saw EBIX trading around its book value, then I might feel it is within my investing guidelines (even if there is a lot of goodwill in that book value). I got carried away after reading the thread on EBIX on the Corner of Berkshire and Fairfax forum and ‘forgot’ my guidelines for just a moment. These things happen when I’m on vacation and I get too much sun.
      Jay

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