Yesterday a reader left a question about where I stand with investing in the banks. My answer was probably not a surprise, in that I said I still believe the fundamentals stink (assuming he was talking about the US bank) because of a lousy real estate market, a slow moving economy, muted loan demand, and the job market still struggling. I do not believe that the book values being reported will stand up.
Right or wrong, that is my take, and I acknowledge there will be short bursts where they trade well, as appears to be happening now.
Something occurred to me, though, as I was answering the question. Does it ever make sense to buy a stock if you believe the fundamentals stink? And if so, when? Everyone has their own way of doing things, and my way is to not buy things that have no fundamental justification -- or I should say, not buy things where I perceive there is no fundamental justification.
What about people who buy distressed companies? There have always been investors who have bought into companies when things look very bleak and had success in doing so. The ideas here appear to include that something that was once great can be great again with the right management or that there is something there to be salvaged, again by the right management and so one way to think of this is a bet that somehow someway the business can be restored, even if it is not clear how or when.
I'm not knocking that; again, some people have great success with this, but it is not something I'm comfortable doing ,and to be clear, what I have in mind here is not a stock that is merely down in price, but where something fundamental has changed or appears to have changed, truly distressing the asset. Sears (SHLD) might be a current example of this. Sears appeared to be on the way down, then Eddie Lampert breathed some life into it (or at least he appeared to deserve credit for this), and now it appears to be waning again.
Given the history of the brand and where some of the locations are, I could easily see where someone could make a convincing turnaround argument of some sort, even if the stores in Prescott have to be closed, and either that argument would be right or not. This is a valid way to invest, but not my way. Is this your way to invest?
This post is really about knowing yourself. Investors have always had success with every form of investing imaginable. Buy high, buy low, buy-and-hold, actively trade, indexing stock picking, dividend strategies, momentum strategies -- the choices are endless and they all can succeed. They also can all fail.
I believe the utility of investing blogs is about taking bits of process from many sources to create or improve your own process. I think too many people don't know what type of investor they should be, which often leads to poor results and sometimes catastrophe. This is an important thing for people to figure out for themselves.