Inversion of logic

The counterintuitive move at first glance seems to be an inversion of logic but where you can invert logic and find it still might work, you find opportunity. Cyclical stocks are great for this.

Earnings rates cycles with the availability of money. Availability of money can increase or decrease in two different ways. One with the expansion or deflation of credit and the other with the migration of capital into the hands of the consumer. (For instance if money piles into China along with tourism and GDP growth, trade, etc... that will likely make it easier to drive earnings.)

Earnings are driven by activity which can be driven by credit cycles. There may be other types of cycles as well and certainly sentiment will change for both market participants as well as industry insiders and key decision makers. Debt and demand funds expansion but also drives prices higher and eventually can threaten to reduce future returns if you pay a higher price. Over saturation can lead to pricing wars and margin and earnings declines which leads to declining equities and debt consolidation and bankruptcies and deleveraging which eventually limits the growth of assets and gives demand a chance to catch up to declining supply until it can lift again.

The counter intuitive thing goes like this... stocks priced below book values are overpriced until you know the assets on the books and thus the book value will stop going down. Even if book values are negative when it seems like the worst idea, it can be a good time to buy counterintuitively. If you know the assets can increase or the liabilities can decrease, the book value can flip around positive. Book value only tells you what a company is worth if it liquidates at market value. A company capable of earning money is worth more alive than dead so the book value only matters if it can impact future earnings. Earnings can be very negative but if a company is worth more dead than alive and you have the ability to liquidate without losing additional money and return more to shareholders than the market price, you can still find value. Growth will be negative on the downward part of the cycle. You will be best off overpaying for growth if you get opinions early and selling it when growth is cheap if you think growth will continue to decline.

That isn’t to say there isn’t logic to fundamentals... it’s just very tricky and has its reasons.