As long-duration common stock pickers we seek to buy meritorious companies which fit our eight criteria for stock selection. However, as investors with a ten-year time frame and 36-years of observational experience in investing, we invoke Bernard Baruch who said, “The activity which made me the most money in common stocks was sitting on my hands.†For this reason, we have an interesting perch to watch the investors around us who are turning their portfolios over with regularity. How does an investor get a feel for shorter duration tops in the one-to-two year time range?
We believe that markets top by running out of buyers and that markets bottom when you run out of sellers. A quick history would be helpful. Nobody was left to buy oil stocks in 1980 at $40 per barrel and nobody was left to sell in 1999 near $10 per barrel. Investors shunned tech stocks in 1991, when they ran out of sellers. By the end of 1999, research analysts were falling all over themselves to up the price targets on Amazon (AMZN), Cisco (CSCO), Microsoft (MSFT), Sun Microsystems, EMC (EMC), and others. Microsoft just broke through to a new all-time high recently after going 16 years without one! Some of those analysts ended up getting run out of the business for their tomfoolery.
Everyone thought the boom in residential real estate could never end in 2005, until the last liar loan was made and nobody was left to buy. The theory was that residential real estate prices never go down across the country simultaneously. In 2010-2011, there were attractive foreclosures and short-sales galore with nobody left to sell. How can you know whether to sit on your hands and stay with winning common stock holdings?
Our first tool is to follow the industry research analysts. At one-to-two year sector or industry tops, the analysts enthusiastically raise the price targets on the most popular stocks in the category. In early October of 2016, those who followed revenue-growth stories like Amazon and Netflix (NFLX) were falling all over each other to outbid their peers on price targets (shades of a mini-1999). This always makes us nervous, because it hints potential stock buying demand may have temporarily run out for stocks like Amazon, which made a peak around $844 on October 6, 2016. Examples of these price target increases on Amazon included:
