As a value investor, I believe every asset is attractive at a certain price. Whenever markets have moved to extremes and presented the opportunity to buy shares at depressed levels, I have been a ready buyer. Since value has outperformed growth in recent years, this approach has been wise and profitable.
The current bear market, however, has altered my thinking. During this crisis, all correlations have zoomed to 1 as markets imploded worldwide, cheap stocks became cheaper, and a value bias led to losses. Knowing that the world has indefinitely changed and we can no longer invest in a vacuum, today I consider the expected trend of prices before making an investment selection. Believing that lower prices lie ahead, I will be a seller rather than a buyer at this time.
Having bought shares for the portfolio in my weekly newsletter EPIC Insights at the market lows, we are now positioned to take profits ahead of the expected decline. Consider the purchase of Cisco Systems (CSCO). Believing fair value was $18, we purchased CSCO on March 2 at $14.31. Within a week the market bottomed and prices headed higher. In spite of this week’s decline, we still have a 25% gain in just over two months.
With a large gain, expectations that the broad market will head lower, and a fully valued stock price, the only choice is to sell the shares. As we enter a volatile trading market, many opportunities will exist to buy stocks at bargain levels and then sell them when they reach fair value. Repeating this process will accumulate large gains and reduce risk. Within our portfolio, this approach has allowed fundamental trades to account for 58% of the total profit. In the future we will be buyers once more. Until then, prudence reigns. I recommend selling the CSCO position as this week’s fundamental trade.