Lets face it, the stock market can
be quite complicated and confusing. "Nothing goes according to
Hoyle". Given a particular set of economic or investment
circumstances a rational investor may deduce certain credible
conclusions which are most likely to happen. Often, however, the
expected end result does not occur. This frequently leaves the
rational investor shaking his head.
The investment market is made up of
thousands upon thousands of market participants. Each individual has
his own investment agenda: for example to maximize income, achieve
capital gains, provide for children's education, cover alimony
payments, etc. In addition, every market player will have his own
personal opinion on the market outlook and accompanying plan of
action. A serious event like September 11, 2001 might cause one
investor to panic and liquidate an entire equity portfolio. A second
investor might review the same grave situation and conclude:
"what a glorious opportunity to purchase stocks at incredibly low
valuations".
But sometimes investment novices
and even professionals read too deeply into why, for instance, a
company executive may be selling stock. Frequently, investors might
rationally presume that this corporate insider is liquidating because
he is privy to confidential information. Unfortunately, many overlook
the fact that the seller could have banking problems (living too high
off the hog and is pressured by the bank to liquefy), may be
separating from a spouse or may be purchasing a new home, vacation
property or a new 36 foot cabin cruiser. The fact is investors do not
know the real rationale why someone is selling stock. Moreover, in
many instances, it is simply NOT relevant to an investment purchase
decision.
In my opinion I believe that we
should try to worry less about why someone is selling a particular
stock and instead focus on analyzing the security thoroughly. Thus, if
a stock is dirt cheap (e.g. discount to book value, net asset value,
low price earnings and cash flow multiples, etc), who cares why the
seller is liquidating. Maybe the individual has a margin call. Perhaps
he is fatigued with a security which he has held for a long time, or
maybe he is fearful of the market outlook. True, the seller could have
a rational negative outlook on the company. However, if we seriously
analyze a company and are comfortable with all the negatives and its
risk rewards, then we should take advantage of periodic price weakness
and undertake an opportunistic purchase. From my experiences, this
tact, more often than not, has proven to provide excellent long-term
investment results.
Irwin A. Michael, CFA
