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At Oaktree, we strongly reject the idea of waiting for the bottom to start buying. First, there’s absolutely no way to know when the bottom has been reached. There’s no neon sign that lights up. The bottom can be recognized only after it has been passed, since it is defined as the day before the recovery begins. By definition, this can be identified only after the fact. And second, it’s usually during market slides that you can buy the largest quantities of the thing you want, from sellers who are throwing in the towel and while the non-knife-catchers are hugging the sidelines. But once the slide has culminated in a bottom, by definition there are few sellers left to sell, and during the ensuing rally it’s buyers who predominate. Thus the selling dries up and would-be buyers face growing competition. We began to buy distressed debt immediately after Lehman filed for bankruptcy protection in mid-September 2008 as described on page 235, and we continued through year-end, as prices went lower and lower. By the first quarter of 2009, other investors had collected themselves, caught on to the values that were available, and gathered some capital for investment. But with the motivated sellers done selling and buying having begun, it was too late for them to buy in size without pushing up prices. Like so many other things in the investment world that might be tried on the basis of certitude and precision, waiting for the bottom to start buying is a great example of folly. So if targeting the bottom is wrong, when should you buy? The answer’s simple: when price is below intrinsic value. What if the price continues downward? Buy more, as now it’s probably an even greater bargain. All you need for ultimate success in this regard is (a) an estimate of intrinsic value, (b) the emotional fortitude to persevere, and (c) eventually to have your estimate of value proved correct.
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