In our previous blog posts, fundamental analysis has shown us the the health of a business, valuation has helped to determine our margin of safety and allowed us to calculate the consider buy and consider sell prices. Now we need timing to tell us when to get in and when to get out.
The removal of emotion is particularly important when it comes to the actual moment of investing or selling out. The moments of when to buy or sell are those when the investor feels the most pressure and, therefore, they are the easiest to get wrong. How can the simple logic of ‘buy low, sell high’ abandon the most intelligent investors? The answer is panic.
Panic urges people to make silly decisions. We know the market can quickly decline. It can also quickly recover. If something happens that we don’t expect, especially if the investor is inexperienced, panic can see all value investing principles fly out of the window as he jumps in with the herd.
Act in haste at the wrong time and what could have been a highly lucrative investment becomes a loss. The stock market can undoubtedly be very cruel to investors whose timing is completely out and 3D Value Investors are not interested in taking unnecessary risks.
Benjamin Graham's Story
In Berkshire Hathaway’s 1985 Annual Report, nine years after Graham’s death, Warren Buffett shared this story that Graham had told him to illustrate the persistent herd mentality of the market crowd and why it should be ignored. He wrote:
“Let me tell you the story of the oil prospector who met St. Peter at the Pearly Gates. When told his occupation, St. Peter said, “Oh, I’m really sorry. You seem to meet all the tests to get into heaven. But we’ve got a terrible problem. See that pen over there? That’s where we keep the oil prospectors waiting to get into heaven. And it’s filled – we haven’t got room for even one more.” The oil prospector thought for a minute and said, “Would you mind if I just said four words to those folks?” “I can’t see any harm in that,” said St. Pete. So the old-timer cupped his hands and yelled out, “Oil discovered in hell!” Immediately, the oil prospectors wrenched the lock off the door of the pen and out they flew, flapping their wings as hard as they could for the lower regions. “You know, that’s a pretty good trick,” St. Pete said. “Move in. The place is yours. You’ve got plenty of room.” The old fellow scratched his head and said, “No. If you don’t mind, I think I’ll go along with the rest of ’em. There may be some truth to that rumour after all.”
This is a great analogy of how investors can get swept up in an accidental sell off fuelled by nothing more than market hype, rumour or trend.
Share prices so often reflect these groundless fluctuations rather than the fair value of businesses concerned. The crowd is attracted to perceived success and will flock to stocks on the rise. By the same token, it deserts stocks whose share price is on the decline. As 3D VIs, we recognise the flaws in this mentality and aim to do exactly the opposite. The market will eventually correct itself to reflect our calculated fair value of a business; we just have to be patient.
Yet while we don’t care about trends, the fluctuations in share price are very real. They may not bear any relevance to the fair value of businesses we’ve recognised as good investment opportunities, but they do influence share prices across the board and therefore, we definitely want to understand them.
When to say ‘When’
To comprehend market trends for our purposes as 3D VIs, we turn to technical analysis. If fundamental analysts study the shop itself; its product, cash flow and profits, technical analysts study the people going in and out of the shop, looking for patterns in the density or paucity of the footfall.
On its own, the analysis of market trend behaviour is abstract. Central to technical analysis is the principle that price action tends to repeat itself purely because of the collective patterned behaviour of investors. Technical analysts focus on discernible trends and market conditions and are therefore very good at identifying them as they happen.
Unlike technical analysts, 3D VIs don’t believe current patterns will exactly repeat those that happened in the past. But used very specifically as part of our timing dimension, technical analysis helps ensure we buy low and sell high. This is only useful when used in conjunction with all the other elements of our strategy dimensions. We simply use methods of technical analysis to determine when we should enter or exit the market.
The Point of Triangulation
3D Value Investing brings together fundamental analysis, valuation and timing in a way that has never been conceived of before. We have refined and developed each separate dimension and applied them as one to market data, achieving consistently outstanding results.
During our research we have found that using all three dimensions together hands the investor a more honest, transparent view of the markets than any methodology to have gone before.
These three dimensions examine crucial areas of businesses and the market at large. They triangulate investment opportunities based on fundamental strengths, independent fair valuation and buy low, sell high timing.
In devising 3D VI techniques we’ve seen that only by using all three dimensions of this strategy together will the best results be achieved. This is because knowing the best time to act is only worthwhile if we have identified valuable targets that present great opportunity with minimal risk.
3D VI sees the financial truth at the heart of an undervalued business that will prevail once the market catches up; it disregards the market hype around value, seeking only solid evidence of what exists underneath. It determines its own valuations and times the buy and sell to maximise returns.
Through the lens of 3D VI, investment opportunities have never been clearer.
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Image is altered. Photo credit: cmelnychuk via photopin cc