Monday, November 23, 2009

Q&A: Investing in range-bound markets

Read the full Q&A

A: About a month after the book came out I regretted its subtitle, “Making money in range-bound markets”. People assume that I know what the range is, and the name also implies that I use technical analysis to conquer this market. “Sideways markets” would have been a more accurate description, but what’s done is done.

Secular market cycles are full of many cyclical bull and bear markets; in fact the last range-bound market, which started in 1966 and ended 1982, had five cyclical-bull and five cyclical-bear markets. It is impossible to make short-term market timing into a process, as you have to get two things right: the short-term economic numbers and the market’s response to them, which in many cases may be irrational.

What I propose in the book (and practice in life) is active value investing. Instead of being a market timer, I’m a buy-and-sell investor, with a focus on valuing individual stocks.

Find stocks that lie within your circle of competence, analyze them as to whether they meet your qualitative criteria (such as competitive advantage, strong balance sheet, high return on capital, shareholder-friendly management. etc.), value them, determine an appropriate margin of safety (discount to fair value, which should be increased in range-bound markets), and you’ll thereby arrive at a price at which you’d want to buy them.

If a stock trades at or below your buy price, buy it; if not, put it on your watch list. When the stock reaches your fair-value level, you don’t hold it, you sell it. Repeat this process over and over again.