Wednesday, November 14, 2007

Fear Brings Opportunity and Digging for Value

Whitney Tilson is the founder and Managing Partner of T2 Partners, a hedge fund, as well as a mutual fund operation. He has co-founded a terrific newletter and established a semi-annual investment conference, Value Investing Congress, where he features a number of legendary investors. As an extension of the conference, he has introduced a new blog to highlight value investment thinking. One of the recent posts is, in my opinion, quite demonstrative of the "inverse emotionalism" that is required to be a successful value investor.

Zeke Ashton of Centaur Capital describes the fear that has infected financial services stocks very aptly:

"Clearly, we’ve got fear now, and at the epicenter of that fear is the U.S. real estate market. This fear is reflected in extraordinary volatility and stock price declines for those companies seen most vulnerable to the real estate bust – most notably homebuilders, mortgage lenders, and mortgage guarantors – coupled with all-time high prices for disaster protection on these names."

If there is a single mantra for value investors, Ashton nails it here:

"But as all value investors know, fear brings opportunity. One of the axioms of fear-based selling is that everything viewed as being in proximity to the danger gets sold."

Indeed, fear brings opportunity, and panic is never discriminating. Damage occurs at the periphery of the disaster and securities are unjustly marked down. True value investors sift through the rubble to unearth the bargains that were caught in the cross-fire. Timing is impossible, but strict adherence to a discipline and patience will provide great long-term returns. In a behavioral sense, it is always difficult to overcome the social pressure to conform. Being ostracized by others (especially clients who don't yet "get it") is a difficult position to maintain. No wonder closet-indexing is so prevalent; closet indexers turn out to be momentum players, just like the indices they hug! But, doing your own thing, ignoring the noise, celebrating the fear of others is a good high probability bet if your decisions are disciplined.

Here is the direct link.


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