When The Bears Come Out; Go Shopping


The volatility of the past 2 weeks has Goldman Sachs, and many others, selling stocks. Sam Miklosko is on the other side of that trade. In order to execute a simple strategy of buying low and selling high, you have to buy when prices are low. That means that when the bears come out, it’s time to go shopping.

Sam started his REIT Opportunity fund at Marketocracy in April, 2009. His returns have averaged 19.11% since then, which compares nicely to the S&P 500’s 15.10% return over the same period. His returns would rank him above all U.S. Equity fund managers for the last 12 months, and in the top quartile for the 5 and 3 year periods. Before taking anyone’s investment advice, you should always check out their track record. Here is Sam’s.

Ken Kam:. Goldman Sachs recently downgraded equities to underweight and the market has just experienced a sharp pull back, are you worried the market will continue its decline?

Sam Miklosko: I would like to see this sooner rather than later as good deals are becoming more elusive. The SPDR S&P 500 ETF (SPY) for example is hovering near all time highs while volume has generally been trending downward. In fact, the market is selling for such a premium and is now well over valued to the tune of 30-40%. REIT ETFs such as the Vanguard REIT ETF (VNQ) and Schwab US REIT ETF (SCHH) are just as overvalued.

Kam: Are you suggesting investors sell their stocks and go to cash?

Miklosko: On the contrary.This is the perfect example to highlight the problem with index investing. For example, the two biggest holdings in both of the previously mentioned REIT ETFs are Simon Property Group Inc. (SPG) and Public Storage (PSA).

Both of these stocks are extremely overvalued and if you as an investor were going to contribute your money to these index ETFs right now, you would be buying what everyone else is buying and paying a premium for the privilege.

If you hold individual stocks, I would first invest the cash in your portfolio in stocks that the selloff has made better values. If you don’t have any cash, then I would consider selling the companies that no longer offer a clear path forward to higher inflation adjusted earnings and investing the proceeds in the stocks that are now better values.

My REIT fund has a high dividend yield so there is always cash to put to work. Amid recent volatility and declining prices, the good news is that we are getting a better values on smartly reinvested dividends.

Please Read: Real Estate Investment Trusts Are The New Savings Accounts

Kam: What about new money, how should investors enter this market now?

Miklosko: For some Investors it would be wise to reserve 6 months worth of expenses in cash. Beyond that history tells us that the best place to park your money is in the market. For those who remain fearful and want to avoid a large lump sum investment into the market right now should simply divide their capital into 3rds. The first third to be invested now, the second 3rd in 3 months and the remaining 3rd in at 6 months with approximately 10-20% of their capital allocated to REIT stocks.

My Take: Unlike mutual funds and ETFs Sam is not required to stay fully invested in a narrow group of stocks come hell or high water.  

Selling stocks to be able to buy other stocks that a market selloff has made cheap is not market timing. It’s more like buying low and selling high. Let me explain.

You see, there is a predictable lifecycle for value investments. At first, a stock is cheap because no one sees any way the company can become more valuable. Next, a good value investor sees something about the company that Wall Street is missing and starts to buy the stock. At this point, the stock is still cheap but starts to move up as more value investors discover and invest in it.

If the stock moves up enough to attract the attention of momentum and quantitative investors the stock’s run will continue. Momentum and quantitative investors don’t really care why the stock is moving up, so their buying often pushes the stock above what the value investors consider to be “fair value” — sometimes way above fair value.  

When a stock trades above fair value, good value investors sell and redeploy the proceeds into a different stock that has not yet come to fruition.

To explore whether Sam’s strategy makes sense for you, schedule a One-on-One with Ken Kam.

About my column.

Disclosure: I am the portfolio manager for a mutual fund advised by Marketocracy Capital Management, an SEC registered investment advisor. Before relying on the opinions expressed in this article, you should assume that Marketocracy, its affiliates, clients, and I have material financial interests in these stocks and may hold or trade them contrary to these opinions when, in our view, market conditions change.

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