The Summer 2009 edition of the Graham and Doddsville investment newsletter from the students of Columbia Business School includes a very insightful interview with Paul Sonkin is managing member of the Hummingbird Value Fund.

“We really specialize at the sub-$100 million, which is the smallest of the small. We are trafficking in the smallest 40 basis points of the U.S. Market where there are still 8,000 companies. So there is still tremendous opportunity.”

Here is an extract(emphasis mine):

GD: What is your take on the market right now? There seems to be some divergence of opinion among investors currently about where we are in the cycle.

PS: What’s going on now is that many of the people I am talking to – many smart, savvy investors –think that the second and third shoe is going to drop.

For that reason, I think there is atremendous amount of money sitting on the sidelines. And, because people expect it, I think it’s not going to happen.

An example that I was talking about the other day is 9/11. I think that there are a lot of commonalities between Lehman and 9/11. Basically, what happened is that Lehman set off a chain reaction – sort of a negative feedback loop.

I think it was a Thursday morning, October 11th when the Reserve Fund announced that they had a lot of exposure and they broke the buck. I remember that we were thinking, “Our cash may not be safe.” Wachovia had failed and you were having these huge bank failures and the world became a very, very scary place.

Everybody pulled back. The country just shut down for a quarter, which is very similar to what happened after 9/11 – although, I think that was more psychologically driven. You had this huge exogenous event, which introduced a huge amount of uncertainty in both cases.

GD: I guess that’s a matter of how you define risk.

PS: Right, the risk of a permanent capital loss. So, in terms of risk, it’s the permanent capital loss versus volatility.

We think our permanent capital loss risk is low,but volatility risk is high.

Unfortunately, what we’ve had over the past 18 months is continually falling stock prices. But that creates the opportunity.

The issue is that investors who have just lost money just want the pain to go away. That’s why they sell at the bottom. And when things are going well, it’s like they just don’t want the juice taken away.

People just don’t want to sell when things are going up and that’s why investors tend to sell at the bottom and buy at the top. It’s just human nature.

Look at Fidelity Magellan, it has compounded at whatever rates it has, but if you look at the rates of what investors have made, it is half because people get in and out at the wrong times.

Read the whole interview if you have time it is really worth it


Tim du Toit is the editor of Eurosharelab. Kindly note that this blog is published for information purposes and is not investment advice. Please refer to our disclaimer. To subscribe to our weekly newsletter, click here.

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