A sane investor in an insane world

It is a while since I have examined a company closely on this blog. And in one sense there seems little point. Why analyse a company carefully to arrive at a valuation when the market is ignoring company results and trading on fear and sentiment instead.

But this is a trap that investors must avoid, similar to the temptation to give up on the stock market altogether at times like this. This is actually an exciting time for investors. The market is proving to be very inefficient at pricing securities and the patient investor can take advantage by buying shares that have ridiculously cheap valuations.

The strange thing about this bear market is that stocks weren't in a bubble at the start of it. Valuations last October were merely average, not crazy like they were in 2000. That should mean that the bear market is a relatively mild one but having said that prices keep going down even when I think they must have bottomed out.

RBS is now at 330p, half the price is was 12 months ago. If 12 months ago I had told you that the share price would halve in the next year, what sort of catastrophes would you have imagined that could cause such a fall? Severe global recession maybe or corporate fraud? Or maybe a large and risky acquisition? Or maybe a combination of all 3? But for the fall to be caused by an attractive acquisition, the risk of recession in a couple of big markets and the write down of some assets in unbelievable.

Warren Buffer with his $40 Billion war chest must be rubbing his hands with glee at the moment. I am just buying some very cheap shares on a monthly basis and learning some lessons:

1) Be more fussy about what you buy. There are thousands of options and if you are patient you may be rewarded with a better price.

2) Try to keep some cash available. The problem with schemes such as always having 10% cash so that bargains can be picked up is that as soon as you use some of the cash to buy a bargain then you have to sell something else to maintain the ratio. So I won't have a ratio but it wouldn't hurt to have a little war chest of my own.

3) Lower the risk by being defensive. Growth shares are really being hammered in this market. Cheaper shares with a healthy dividend should hold up better.

The second most important lesson is not to give up on the market. Unless this is the road to Armageddon the market will recover at some point. And if this is Armageddon then it doesn't matter where your money is!

But the most important lesson is that money doesn't make you happy anyway so spend most of your time investing in more important things!

God bless you.