The Rule of Greatest Collective Financial Loss and Buffett’s October

Even if the latest bounce for equity markets, especially in the U.S., fizzles out this week we have evidence of one of the cruel aspect of price action. This is the rule that stocks and markets tend to move in the direction of greatest collective loss.

Clearly, this is usually the punishment which short term traders receive. There can be few of us who are not aware of the statistic that 90% of day traders / swing traders lose money. Even worse, even if you are normally one of the 10% who win, there will be times when you are part of the herd that is losing its shirt.

The reason for this pessimistic discourse actually stems from a couple of October events. The first was of course the way we have veered away from the nightmare scenario of The Great Crash of 2014 and towards the idea that just like January and August, the bears have once again tried and failed to deliver their Doomsday Scenario.

Ebola looked to be a decent trigger for a collapse, as did the prospect of imminent rising interest rates.

However, as most of us have not succumbed to the first man made disease, and central bankers clearly do not have the bottle for risking a crash scenario on stocks, the worst threat looks to be over for now. This is not to rule it out, just to say that a wobble is not a crash.

Getting back to the “greatest collective loss” theory, it may actually be that the latest legacy this month will have is for the uncrowning of the worlds greatest investor, Warren Buffett. His triple blowout of recent weeks has consisted of rather painful pies in the face delivered courtesy of three giants / former giants of the corporate world: Tesco (TSCO), Coca Cola (KO) and IBM (IBM). Of course, it is the case that anyone can have a bad day at the office, even someone of the stature of Mr Buffett, but there are a couple of messages in mitigation even for those who are tempted to say, “There is no fool like an old fool.”

Firstly, the best aspect of the buy and hold strategy is that not that the company you are invested in is necessarily a blue chip wonder which may grow forever, it is that you have the culture of running profits. This is a basic winning rule for the day trader, as it is for the value investor. The second point may be that the clue is in the names of Buffett’s triple nemesis collection. Tesco, Coca Cola and IBM all evoke the idea of solid, giant, corporate names. The problem is that they did this a decade, or even two or more decades ago.

The problem is that no corporate gift necessarily keeps on giving forever.

Some industries and sectors fade, and others go out of fashion with the consumer as tastes and behaviour patterns change. Buy and hold does also have to be buy and exit. Ideally, the manner of the exit is not when a company have just delivered three profits warning and has its business model in tatters. Unfortunately, even for Mr Buffett getting out when the going is good is not an easy thing to do.