What's simple isn't always easy.
I can’t tell you how much I’ve learned in just these first several months I’ve been playing CAPS. I’ve learned about new companies, stocks, industries – found some terrific investors I might have not otherwise have found and whose ideas and insights I have used, and will continue to use, in making my own investing decisions.
One thing CAPS has been especially good at, however, is reinforcing lessons I’ve already learned. CAPS has reminded me that the simplest investing lessons are often among the most difficult to implement.
While CAPS has reinforced a lot of investing lessons for me, one of the biggest so far has to be what Warren Buffet taught us. "If [investors] insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.” A simple lesson that certainly rang true with me the first time I heard it, but one that is sometimes difficult to implement.
How has CAPS reinforced this lesson? At the risk of being a bit redundant as I touched on this briefly in my “My Best Picks” blog, my CAPS calls on a basket of homebuilders has shown me, in spades, just how powerful this lesson is, and how difficult it is, sometimes, for many of us (including me) to implement.
What is to follow might strike some as an “I told you so” moment, but if you’ll indulge me, there’s what I hope is a real lesson here – and one that has impacted and will continue to impact me as an investor.
I made my first CAPS outperform call on homebuilder Toll Brothers on July 12. The housing market was, and still is, under some pretty stiff pressure. Sales had dropped off dramatically, pricing was showing significant signs of weakness, skeptics pointed to growing inventories, the softening dollar created fear of higher interest rates on the horizon – there certainly was, and is, a lot to be afraid of.
I picked-up 5 additional homebuilders on August 22 (MDC Holdings, Lennar, KB Home, DR Horton, and Pulte Homes). My reasoning, as you can read in my pitches, was simple. Trailing P/E ratios were in the single digits – and mid single digits at that (many around or below 5). I knew that the housing market would eventually turn around, and I was getting what I believed was a really good price on these stocks. While I knew, and stated in my pitches, that there might well be more short-term pain, I believed that over a long period of time these entry prices would make for successful investments.
I received a lot of pitch replies to these calls… things like:
“Wow, I hadn't noticed that the TOL PE had dropped so low. I'm going to wait a little while here (and kid myself that I CAN time the market), but I agree with you that you're picking up TOL on sale.”
“I absolutely agree with this one, and for the sentiments you shared, but I think you're awfully early. I may STILL add this one to my CAPS pick (I debated for a good while, and decided to wait)….”
“Since we have opposite opinion in this matter, lets have a friendly bet. I expect those homebuilders will behave like internet stocks in March 2000, before end of this year.”
I included the last pitch reply because I think it typifies the fear that surrounded the sector at the time I made the calls – and to be fair, the year isn’t over yet so the bet is still live – but I want to concentrate on the first two pitch replies.
Here, a couple of my fellow Fools agreed with me, and yet couldn’t bring themselves to make a CAPS call at the time (I haven’t checked to see if they’ve added homebuilders since) because they, like so many others, seemed to be afraid. As Warren has told us, however, that would seem *precisely* the time to make such a call.
Now, before you think I’m tooting my own horn a bit too much, there’s one very important thing I *didn’t* do – and that was to put *real* money on the table and scoop up shares in one or more of these homebuilders at what I believed were bargain prices at a time when most investors were fearful. It’s easy to make a CAPS call and take the risk when my and my family’s financial well-being isn’t at stake. Doing so in the real world is an entirely different matter and I must confess that I, too, felt the fear of further short-term pain in this sector and therefore didn’t act.
Sometimes the simplest investing lessons are the most difficult to implement.
While I certainly have incorporated this lesson to some extent in my real-life portfolio (like adding more to positions on dips), I've come to the realization that I have a ways to go in learning to utilize this principle to its greatest advantage. But thanks to Warren for teaching me the lesson in the first place, and thanks to CAPS for helping to reinforce that lesson, next time I see an opportunity like this I will hopefully be much more inclined to put *real* money on the table. I’ve invested a lot of time with CAPS, but I think what I’ve learned here, or what’s been reinforced here, is, by itself, a very nice return on that investment.