Sam Zell Expects a Market Correction (Video)

Sam Zell was on Squawk Box this morning and warned of a correction. He repeated many of the themes that have been written here over the past few years, including the theme of Federal Reserve excesses leading to rising asset prices. It prompted me to go to Zell’s website, which listed quotes outlining his philosophy. I agreed with almost all of the quotes, but I was especially struck by one, because years ago I had written the same thing on the whiteboard at my office (paraphrased):

“Every day you’re not selling an asset that’s in your portfolio, you’re choosing to buy it.”

The idea is that managers have to look at everything fresh every day in light of all new information, so that holding a position is no different from buying it, especially if there are no tax implications for selling (e.g. positions in retirement accounts, endowments, etc.). That perspective helps prevent managers from falling in love with their positions. It’s akin to Sir Arthur Quiller-Couch’s admonition for writers to “Murder your darlings.”

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2 Responses to Sam Zell Expects a Market Correction (Video)

  1. w says:

    Hey – like the quote. I’ve thought about this one for quite a while, but I have a question about it…consider this: in the case where you require a 30% “margin of safety,” e.g., stock price < .7 * "intrinsic value", you would not buy the stock until it reached that level. At the same time, you wouldn't sell the stock until it appreciated to its intrinsic value. So the margin of safety is, essentially, a twilight zone where: not selling =/= choosing to buy.

    So that's sort of my question. If the stock price is .7 (with intrinsic value=1), what do you do when it rises to .8? you wouldn't buy it at this level, but it also wouldnt make sense to sell here if you thought it was worth 1. If it did make sense to sell after appreciation to .8, then you would sell your holdings anytime stock price appreciation squeezed your margin of safety, even if the stock price was still below what you thought it was worth (intrinsic value).

    I do like the quote…the corresponding analogy is basically: everyday you must sell your stock, and you have the option to buy it back (no transaction fees). Do you do it? if no, then you should sell. if yes, then you should hold. But again, how does this reconcile with the question of margin of safety? any thoughts would be appreciated. thank you!

  2. Ray Galkowski, CFA says:

    Thanks W.

    There are so many things to consider in the decision to sell (or buy) a position (e.g., suitability for a client, taxes, transaction costs, downside risk, how it correlates with other positions in your portfolio, whether you have liquid capital available to invest or you have to liquidate a position to invest, etc.), but your intrinsic value estimate and the MOS that the market provides helps take pure valuation and expected return off the table in most cases. You either believe you have an MOS or you don’t. If you have an MOS, after considering all the above in parentheses, the decision comes down to whether the MOS in the position you own is superior to the MOS that is available in other possible investments.

    Bill Nygren, for example, has said he has no problem selling a position before it realizes full value if he has no cash available and a better opportunity comes along.

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