Carpe Diem

Yesterday I discussed seizing the opportunities that a risky world presents. What do I mean by that?

I’ve discussed before how rebalancing a portfolio regularly adds value because of mean reversion. Mean reversion is just a fancy way of saying that markets don’t go up or down forever. Improving markets inevitably attract competitors. The increased competition lowers margins and restricts profits. Deteriorating markets inevitably force weak companies out. This creates opportunities for stronger players to improve their earnings. What goes up comes down, and vice-versa.

So much for normal mean-reversion. In times of crisis, the news-cycle has a tendency to build upon itself, until otherwise rational investors capitulate and sell out just because everyone else does. The storm clouds are all dark, and no silver linings are visible. At all.

It’s times like these the long-term economic investors like Warren Buffett step in. Shepherding their cash during the good times, they take advantage of the panic of the moment to take significant stakes in fundamentally sound businesses at bargain prices. Call it survival of the patient.

Mean reversion works best with market segments; Buffett-style bargain hunting works best with high-margin companies on the wrong side of a market panic. With the European debt-crisis and BP disaster we may be in the early stages of both opportunities. Only time, and the market, will tell.

Douglas R. Tengdin, CFA
Chief Investment Officer
Hit reply if you have any questions—I read them all!

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