Managing through inefficient markets
The only way to combat the inefficiency is to extend out how long you hold an investment for. The markets are inefficient short-term but fairly efficient long-term. Risk-aversion is quite high right now(and for some reason our space is classified as risky) but I doubt it will remain this high consistently for the next year or two. At sometime during that two year span investors will get their appetite back and will take our stocks for a ride.
And when people start buying they may take that stock with a PE of 3 upto maybe a PE of 9, a solid 200% return. So what does it matter if you have to wait two years(or 3, or 5) to get it, it's still an excellent return even five years out.
Should 200% returns really be easy to get? No, that's why it usually takes a little patience to achieve them. The difficulty lies in finding the quality companies you are willing to stick with through thick and thin because it's guaranteed your conviction will be tested more than once during the two year time frame.
And if the company drops to a PE of 1, sell something else that hasn't dropped as much and load up(just as many of us here did a little over a year ago). Then when it returns to a PE of 3 you have a 200% return on those newly purchased shares. Even if you had to sell something with a PE of 2 in order to buy the stock with a PE of 1 it is worth it. It's all relative.
I've been 100% invested through this entire downturn and am flat for 2010 because of the method mentioned above. And I was 100% invested for the entire economic crisis and had enormous returns using the same strategy.
But again the key component is you really have to believe in the companies you are invested in, otherwise it won't work because buying more of something that has dropped 50% is not easy unless you are very confident in your analysis and research.
-Adam
"Talking heads should be considered as sideline amusement and nothing more" Dr. BlahBlah
