Dealing with Significant Stock Price Declines
Posted on March 11, 2007
We recently came across a great post by Tom Brown, a leading hedge fund manager specializing in banking and other financially-related equities. By offering a window into the thought processes of a successful investor going thru a major stock correction, we think the article may be useful for other investors facing stock declines, even in non-financial shares.
By way of introduction, Tom, and several other high profile hedge fund managers, have recently been caught long substantial amounts of shares in the sub-prime mortgage sector. That the stocks in this sector, e.g. LEND, NEW, have taken a beating, is probably a major understatement. So what is Tom’s take on the carnage?
“Is the near-term weakness in the names jarring? Of course it is. But regular readers of this site have been similarly jarred before. We went through it with First Marblehead in late 2005, with Capital One in 2003, and AmeriCredit in 2002. Having been through those drawn-out (and ultimately quite profitable for us) sagas, I have long since given up trying to pick precise bottoms or tops. The best I can do instead is to recognize value when it appears–and then act when everyone else has gone off his rocker. Like, say, now.”
Later on Tom comments:
“But I’ve been through this before. If history is any guide, the next few months are going to be a bumpy pain in the neck. But I continue to believe that the long-term reward will be substantial. This is the stock market. A bell doesn’t go off that tells investors when the risk has passed–and when the outlook does finally seem positive, the stocks will have already soared. But to me, the fundamentals are pretty clear, and bullish.”
We don’t really have an opinion on the sub-prime market, but we think the above is great advice for investors in any sector suffering a correction or a bout of extreme volatility.
If you are interested, you can read Tom’s entire article by clicking here.
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