Anticipation of errors has been hallmark of investing as preached by Munger - but may be when he meant errors, he meant permanent errors. There could be MTM losses if Price corrects due to 1) market related reasons 2) temporary change in underlying business aka quarterly fluctuations and 3) permanent downward change in business. I have not come across an article which lays out as to how a prudent investor/trader react to MTM situations.
Clearly, case 1 represents a buying opportunity and case 3 represents an exit opportunity; Case 2 is unique in the sense that it could happen with a general market slowdown (case 1) or a company specific issue. Several examples to demonstrate these 3 cases are Firstsource, ICICI Bank, Vaibhav Global, Rallis, IPCA labs, Bata India, KPIT and now perhaps Mindtree
Barring Vaibhav Global (Deterioration in Cash flows due to competitive reasons) and IPCA labs (Deterioration in fundamentals due to regulatory reasons), businesses have always come back and so have the prices. In rest of the cases, an investor, just like a trader, is faced with the question of exiting the weaker franchises/stocks to rotate into better ones, but how does one do this a bit more systematically?
Clearly, case 1 represents a buying opportunity and case 3 represents an exit opportunity; Case 2 is unique in the sense that it could happen with a general market slowdown (case 1) or a company specific issue. Several examples to demonstrate these 3 cases are Firstsource, ICICI Bank, Vaibhav Global, Rallis, IPCA labs, Bata India, KPIT and now perhaps Mindtree
Barring Vaibhav Global (Deterioration in Cash flows due to competitive reasons) and IPCA labs (Deterioration in fundamentals due to regulatory reasons), businesses have always come back and so have the prices. In rest of the cases, an investor, just like a trader, is faced with the question of exiting the weaker franchises/stocks to rotate into better ones, but how does one do this a bit more systematically?
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