So what does one do in a volatile market like we have seen lately? Absolutely nothing. After buying shares of a new company each day last week, I am sitting around doing nothing. I am spending my time re-reading the contrarian investing bible and reading the usual blogs and websites.
A particular Warren Buffett quote reminds me that doing nothing is good:
“”I call investing the greatest business in the world because you never have to swing. You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! and nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.”-Warren Buffett
With 14% cash on hand, its tempting to get into some positions. Especially Microsoft which has been climbing the magic formula list this past week as it hits new lows. I continue to tell everyone I know that the magic formula has to be among the most undervalued books/sites/investing system around. Where else can I find a screen that looks for great businesses at a discount. Its only a matter of being patient and sticking with the system. For many years studies have proven that low P/E’s outperform the market, but investors/speculators continue to invest in companies that are trading at sometimes catastrophic P/E’s. Companies with high P/E’s are usually dangerous in this type of market as analysts expect companies to deliver outstanding numbers. What happens next? The company delivers great numbers (usually double digit growth ) but the stock gets pummeled (i.e. AAPL, GOOG,MSFT). How do low P/E’s fare during earnings season? Good. David Dreman highlights this in the book. Expectations for these companies are so low, no matter what kind of numbers the company reports, chances are a) a positive earnings surprise will make the stock soar (WFC) or b) the news has been priced in already.
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