My Valuation Discretionary Quandry

Posted on Aug 10 2016 - 12:34pm by Dan

I am a man facing questions that have no ‘right’ or ‘wrong’ answer per se.

These questions revolve around the valuation investing side of my book.

As I have stated previously, we do not like these markets in a valuation investing context.

I’ll be honest.  It feels like 1999 all over again.

1999 was a time when warning bells on the economy started to sound aloud for anyone willing to listen.  Individuals then tried to short the market during that time period based on such ‘warning klaxons’.  And they were absolutely destroyed as the market ran higher still as irrational buying continued.  People were buying companies that made absolutely no money; and they bought them hand over fist.  Why?

Internets!

Seriously, it was about that stupid.  I remember that time well.

Objective metrics that we follow are again flashing warning signs.  At the same time, negative yields abound around this planet, increasing the cost of all retained earnings on all businesses that must endure such lunacy.  GDP is falling off.  Labor force participation is at all time lows.  There are other metrics we pay attention to that lead us to believe that valuations on many companies are becoming somewhat … piqued.

Yet I remember the lessons of 1999.

The market can run higher still.  Based on nothing more than irrationality.

Thus my quandry. 

Those who know the process I use to valuation invest understand that some of what I do, is based off of discretion.

How heavy should I be?  In other words, how many valuation positions should I have on?   That’s something I have to answer in a discretionary manner.  At the moment, that number of valuation positions is two.  That’s right.  Two.  I’m light.

But another tool in my arsenal is a very simple, supportive, non-directional strategy to buttress the efforts of the valuation investing positions.

Should I increase the percentage weighting of those non-directional strategies in this environment?  In this way, I can keep my drawdown numbers as low as they are, and no matter what the markets do, I am kept safe, and I’m still making money.  In this way, if the market rallies?  I make money.  If the markets fall, those non-directional strategies can still perform well.  So should I increase the percentile weighting they represent in the account?

I have not taken any definite action as of yet. But these are the variables I am mulling over in my mind

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