Tuesday, July 21, 2009 7 comments ++[ CLICK TO COMMENT ]++

A very thin line between greed and patience

Most investors don't think they are ever greedy—it's those executives who get paid millions even while running companies into the ground that are greedy right? Or as many on the right might think, it's only those greedy union workers right?—but I have been wondering if I am being too greedy when it comes to investing. There is a very thin line between being greedy and being patient.

I have wondered whether I am being "too cheap" when attempting to purchase some securities. This might seem like a good thing—I'm going for a low price after all—but at what point does it cross over into simply being greedy?

The following image plots a chart of a stock I'm trying to acquire (I'll disclose it once I purchase it.) It's very thinly traded and I am trying to buy it at 0.94.



The stock rarely ever trades below 0.95. So am I doing the right thing by waiting for a lower price? Or am I just being greedy (and stupid)? The difference between 0.94 and the more reasonable 0.95 is roughly 1%. So, am I being greedy by seeking a tiny extra bit? Usually I don't care about 1% but this is a special situation with fixed maximum upside so 1% matters somewhat.

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7 Response to A very thin line between greed and patience

dev
July 21, 2009 at 2:44 PM

You are either being greedy or the upside yield youa re looking at isn't enough (and hence you shouldn't buy it even if it goes to .94)

Having fixed upside means that 1% matters even less, not more.

Sivaram Velauthapillai
July 21, 2009 at 3:23 PM

Thanks for the thought but I don't get your logic. But I forgot to say an important point. This is a special situation (that's what I mean by fixed upside). For regulator common stocks, 1% is not a big deal.


"Having fixed upside means that 1% matters even less, not more."


If the max upside was limited, wouldn't small differences mean a lot, not less?

For example, let's say the upside is 10%. Well, if you waste 1%, that's a huge amount. It's almost like 10% of the total return (1/10).  In contrast, if your upside was potentially large, say it ranges from 8% to 30%, which would be the case with normal common stock investing, then losing 1% may not mean much.

Am I missing something?


As for your comment about upside being not large, that's true. But I find most special situations (risk arbitrage, liquidations, etc), it is hard to find many opportunities with large upside. I would say 10% is reasonable--I try to aim for 20% max. (But do note that these situations tend to have reasonably fixed time periods as well, usually under 1 year (in annualized terms, the upside will be larger than it seems); also the probabilitiy of success, although never 100%, is much higher in my opinion).

dev
July 21, 2009 at 5:04 PM

I may have some screws loose here, but here's what I'm thinking...

let's exaggerate the 1% discount you are waiting for to 50% discount.

Assuming 2 cases:
1) Stock goes from $1 to $2
2) Stock goes from $1 to $4

Let's also assume that you are waiting until the stock falls down to 99 cents.
In case 1, waiting will mean that you gain extra 2% return
In case 2, waiting will mean extra 4% return.

So if the potential return is higher, "waiting until it gets cheaper" is more valuable strategy.

This just popped up into my head on the fly as I was reading your post so there might be something wrong with how I'm framing things....



In terms of adequacy, if 10% is adequate, wouldn't 9% be just as adequate? Unless you are aiming for a specific target return for the year... getting that exact would also require forecasting time frame since that will make a difference in your annualized return as well..

dev
July 21, 2009 at 5:12 PM

I may have some screws loose here, but here's what I'm thinking... 
 
Assuming 2 cases: 
1) Stock goes from $1 to $2 
2) Stock goes from $1 to $4 
 
Let's also assume that you are waiting until the stock falls down to 99 cents. 
In case 1, waiting will mean that you gain extra 2% return 
In case 2, waiting will mean extra 4% return. 
 
So if the potential return is higher, "waiting until it gets cheaper" is more valuable strategy. 
 
This just popped up into my head on the fly as I was reading your post so there might be something wrong with how I'm framing things.... 
 
In terms of adequacy, if 10% is adequate, wouldn't 9% be just as adequate? Unless you are aiming for a specific target return for the year... getting that exact would also require forecasting time frame since that will make a difference in your annualized return as well..

Sivaram Velauthapillai
July 21, 2009 at 7:11 PM

Dev: "Let's also assume that you are waiting until the stock falls down to 99 cents.   
In case 1, waiting will mean that you gain extra 2% return   
In case 2, waiting will mean extra 4% return.  "


Ok, I see what you are saying. That's correct. I was looking at it was in terms of percentages, while you were thinking in terms of dollar figures. That is, in you scenarios, you are saving 1 cent in both cases; in my case, I was assuming you save 1% in each case.

Since this is a liquidation I'm looking at, the upside is best thought of as fixed (it either succeeds or does not and the payoff is fixed). I think what you are saying is more insightful for normal common stock investing, where the upside varies.


In terms of adequacy, if 10% is adequate, wouldn't 9% be just as adequate

Yeah.. that's what I mean.. if you reach for an extra percent, is that simply due to greed? Or am I doing the right thing by being patient and waiting even if it's 1%?


What I describe here is kind of minor (1% or thereabouts) but it is more interesting if the difference was, say, 5%. Someone might ignore 5% if the upside were high (say 30%+) but that's 5% you gave up. Five percent compounded over the long run is a big number.

dev
July 21, 2009 at 9:29 PM

Hmm yeah that makes sense.

As for the opportunity you give up, there are tons of securities that yields more than 5-10%. There is no reason to stay in cash if you don't go with this opportunity, hence you are not "giving up" anything.

Sivaram Velauthapillai
July 22, 2009 at 11:10 AM

I have been thinking about that a lot (I.e. opportunity cost of not investing) but the answer is not as obvious as it seems.

A lot comes down to you future expecation for the market. Pure value investors probably don't pay much attention to the future but macro-oriented guys like me do. Presently, I'm slightly bearish (but not ultra bearish). I actually think there is a risk of the market collapsing 30% to 50% more. But it may not happen with one big plunge. Instead, it could decline over the next 3 or 4 years. I am maintaining my bearish view because we have not hit valuations that typically mark bear market lows.

So, yes, you may "lock in" say a 10% return by buying stocks now but it will be painful if prices drop further. I may miss out on some upside but I am content to wait. I never found anything extremely attractive even when the market hit the bottom in April or back in November. However, I may have missed out on the bottom for junk bonds late last year.

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