KCR believes bear market strategies today suggest a speculative mania similar to the internet bubble.
- “Rule #1: Never Lose Money, Rule #2: Never Forget Rule #1” –Warren Buffett
- Don’t Pay High Prices for Firms that Lose Money (ignore the herd!)
- The market cap of firms that lose money had exploded higher to a staggering ~$6.5 trillion
For investors looking to learn about some of the most simple, time-tested, and profitable investment methods please click here.
Basic Principles of Investing Are Being Ignored Today as Investors Engage in Stock Speculation
Recent investment returns have been very high and this has led people to forget the most important investing principles. The massive levels of government intervention have made it seem almost impossible to lose money. No matter if you bought bonds, equities, or even many speculative sh!tcoins, it feels like everyone is getting rich.
People with money sitting in checking accounts, online savings accounts, money market accounts, or other FDIC insured products often feel left behind. These are, after all, exciting times to be using money in your investment account to trade stocks with vigor!
Centuries of history teach us that periods like today never end well. It is often at precisely these moments that investors need to remember that the preservation of capital is the key to compounding returns.
And that is the purpose of what follows. KCR feels like a grandmother reminding their grandkids to put a jacket on before setting out to play in the snow. While not particularly gratifying, it is nonetheless advice worth heeding in our view!
Basic Investing Principles: Some KCR Resources
With short-term bonds, government bonds, treasury bills, and even corporate bonds offering little in the way of yield, investors are forgetting the basic principles of investing. Long-term investment strategies that focus on fundamentals, valuation, and discipline have never been this out-of-favor. In our view, financial suppression has driven the surge in those opening a brokerage account to new highs for all the wrong reasons.
We believe that the collapse in safe income from certificates of deposit, money markets, and other traditionally conservative methods of building wealth is creating terrible unintended consequences. We have documented that everything from index funds to basic asset allocation strategies now exposes investors to previously unimaginable levels of risk.
Seth Klarman is one of the most accomplished and greatest investors in history. Post the implosion of the junk-bond mania he wrote a book called A Margin of Safety. That book has been a foundational piece of the KCR research team’s thinking since we started investing many decades ago.
Despite being feted with accolades like legendary financial mind and newsletter publisher Jim Grant, the book was quickly taken out of circulation. As the book’s wisdom came to be better understood, the price of an actual copy of the book has risen into thousands of dollars.
Mr. Klarman professed a desire to help just a few investors avoid financial calamity. A view very much shared by KCR and its research team. For those unable to afford a copy of the margin of safety book, we offer free takeaways of that book. Simply look for that piece under our Quick Takes category.
We have also written up other books we feel are instrumental to establishing some basic but essential investing habits. You can read our take-aways on Galbraith’s legendary book about market euphorias here. We also wrote up Fisher’s book Common Stocks and Uncommon Profits.
KCR has and will continue to write up the key lessons we learned from some of the most important and timeless investment books. When we do so, they will always be free. Our team believes good investment principles are the key to wealth preservation and creation. We hope sharing what we learned from the greats might help others avoid the mistakes we see being made everywhere.
Best Short Investment Ideas: KCR’s Take
Having given our “grandmother’s warning” about the surfeit of risks in today’s market we wanted to provide some color and resources on the tremendous short opportunities we see in markets today. The KCR research team is highly experienced at short-selling and advises caution for all but the most experienced investors.
We would never suggest short selling for individual investors if only because the theoretical losses are unlimited. With that said, financial advisors should be able to guide you to long/short strategies available in mutual funds, exchange-traded funds ETFs, and other vehicles if appropriate. In our view, they may prove invaluable for protecting wealth when the current mania subsides.
The KCR team built a sophisticated tool to help short sellers identify top picks and to help serve as a barometer for risk appetite. Learn about our “Short Sellers’ Low Quality Signal” as the work has been in auditable distribution for 11 years now. The tool’s out-of-sample performance has surprised even the KCR team.
We published a recent piece titled Growth Investors – Speculating or Investing? That piece showed that stocks with the highest expectations, and hence the ones most likely to disappoint investors and potential collapse, were trading at valuations last seen at the peak of the dot.com mania. The names at the bottom of that piece were ones that we believe are ripe for those interested in doing the deep dive research on shorts.
Our piece What Does Volume Mean in Stocks took another tack to identify great candidates for short sellers. The KCR team noticed that many of the most speculatively valued companies in the market today had volume statistics that were simply off the chart. We believe investing is the act of viewing a share as a fractional interest in an actual company and participating in that firm’s future success or failure.
When we see so many shares of a company trading that it implies the entire business is being bought and sold every few days, that tells us the owners are speculators. That is also a classic flag that the people buying these stocks are “weak hands” or won’t be shy to dump their shares if the price action turns negative. At the bottom of that work, you will find another list of shares we think are remarkably vulnerable and great candidates for short research.
Summarily: we believe the best and most basic investment habits are available for free on our website. While the investment press often highlights those who have made money quickly and without effort, these instances are the exception not the rule in our view. As always, KCR encourages investors to seek the advice of a qualified RIA. In our view, the input of a dedicated financial professional has never been more important than in today’s frothy markets.
We wish to thank our existing readers for their interest in our work. We know our research just isn’t for everyone. Particularly in this environment. As big believers in the lessons of history we are encouraging prudence during a time of profligate financial conduct. While not in vogue at the moment, we have every expectation that economic gravity will come down with typical ferocity and at great cost to many of today’s speculators.
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