“I bought on impulse”, “it was a speculation” these are some of the things we tend to hear or say when our fingers get itchy and haven’t been trading as often as we used to. This is also the period when we tend to make silly mistakes that cost us the most! Being in a market that has already experienced a substantial bull run means that many of the stocks are already trading at high valuations. To a value investor, it means that there’s very little opportunity to take up a new position because the stock’s P/E and P/B would most likely be classified as overpriced.
Value investors at this point would most likely be holding onto a lot of cash, waiting for the big correction to come before they get an opportunity to load up on the stocks they were dying to buy before the correction. The challenge faced by value investors not only lies in their analysis skills, but ultimately, their patience.
When we hold onto cash, it gets uncomfortable seeing that it is just idling there and not generating any stream of income or providing capital returns. This is when some value investors decide to try their hands on what they are not experienced at, short-term trading. They will continue to do their fundamental analysis, but find that the speculative stocks that have been generating 20-30% returns have fundamentals that looks shady. They then decide that “Hey, it’s just going to be a short-term trade, once I make 10% I’ll be out of the trade.”
That is when disaster strikes. For awhile, some may get lucky and manage to make their profits. But what if the trade immediately turns sour? Does the value investor (possibly you), have the right skill sets to play the trading game? You can’t trade a speculative trade the same way you invest in a value stock. It would be almost impossible to do it if you stuck by the rules of value investing because fundamentally the company’s prospects might not even meet your criteria to be considered an investment.
There’s definitely a price that you are going to pay if you want to learn a new skill set and to some, it can become very costly if you approach it wrongly. Should you choose to remain a value investor, be patient and remember, when in doubt, stay out. Don’t throw good money at bad stocks in that moment (possibly period) of impulse! Instead of being fixated on the stock market and watching speculative stocks go up and down 10%, why not take the time to build up on your investing knowledge by reading books while storing up the warchest?
Personally, I’ve been sitting and collecting cash while reading a lot to self-improve both mentally as well as learning more about value investing in this period of time. Good thing I have some income streams from dividends so that takes away the itch from wanting to enter a trade. There’s so much to learn about value investing and I’ll just store up cash in the meantime!