American Consequences - February 2019

EXPLOITINGTHEPENDULUM OF INVESTORPSYCHOLOGY

As the pendulum of investor psychology swings like a wrecking ball away from ǼE[PIWWERHXS[EVHLSTIPIWWMRZIWXSVWEVI sure to overreact and create a huge number of attractive investment opportunities.

perfection, assuming that this strong growth will continue for years to come. But at some point, the flawless sentiment priced into stocks will start careening the other way. There’s another important lesson we can draw from Bill’s story... As the pendulum of investor psychology swings like a wrecking ball away from flawless and toward hopeless, investors are sure to overreact and create a huge number of attractive investment opportunities. When Corning finally bottomed in 2002 around $3 a share, sentiment was as irrational as it had been at the peak in August 2000. Sure, a full recovery was still years away. But Corning had proven it could weather the worst of storms. It was a classic deep-value moment... where the upside potential far outweighed the downside risk. (Investors that bought Corning stock near its lows in late 2002 made 10 times their money a year later.) Superior investors learn to exploit the pendulum of investor psychology as it swings between flawless and hopeless.

Investors anticipated that Corning’s acquisition binge would be disastrous once demand slowed. Sure enough, the company wrote down the value of its newly acquired businesses an enormous $5 billion the next year. It also acknowledged the following... Most of the impaired facilities are currently available for sale [and] others will be demolished. The impaired equipment will be auctioned, sold, or disposed during 2002. Four years later, in its 2004 annual report, Corning noted the market was still out of balance, saying... We see few signs of a broader recovery in overall demand, mix of premium products, and pricing for our products [in the telecom division]. I want you to keep the following in mind... Strong capital markets and historically low, near-0% interest rates have once again encouraged U.S. corporations to go on a “buy growth” binge over the past several years. As a result, investors have priced stocks to

Mike Barrett has two decades of investing experience in stocks, real estate, and precious metals. He's also been an analyst with the Extreme Value investment advisory for the past 8 years.

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February 2019

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