A quick note on how we use our market forecasts. We are big believers in the KISS principal. Complicated strategies are hard to execute and prone to major failures. Knowing that the stock market is likely to sell off 20% or so sometime in 2010 is not the same as having the ability to capture the profit, either through short selling, or a timely exit (and subsequent re-entry). Rather, we use our forecasts to help with the valuation process and with risk management. Stock selection for us starts with basic business valuation; it is impossible to value a business in a vacuum. Consumer discretionary businesses are worth less currently given the likelihood that it will be years before consumers have the wherewithal to spend robustly once again. Consequently, we require a larger discount than previously before buying retailers, restaurants, and other consumer discretionary businesses. Likewise, we would like a bigger margin of safety in general before purchasing a share of a business right now, given our view that the market is overbought, and some 25% over valued. Conversely, we are also likely to sell a successful investment more quickly than otherwise in order to prevent price risk from building in the portfolio in a higher risk market.
We urge individual investors to always stay properly diversified and to avoid allowing certainty to rise too high in a very uncertain world!
Happy Holidays!
