How to Know What to Buy, and When to Buy It

Weekly Issue

Every so often a combination of ideas comes along that changes how you think about markets. Deep value has always been my home field. It is where I am most comfortable. I know how to read a balance sheet, I know when credit quality is falling apart, and I know when a stock is so cheap that the market is practically daring you not to buy it. That is the foundation.

But foundations do not tell you when the storms are coming. Momentum extremes do.

Over the years I have learned that the percentage of stocks above their 200 day moving average acts like a thermometer for the entire market. It tells you when the fever is breaking and it tells you when the patient is headed for the emergency room. When that measure collapses under 15% you are looking at outright panic. History is perfectly clear about it. March 2008 at 14%. March 2009 at 9%. August 2011 at 12%. March 2016 at 13%. December 2018 at 10%. March 2020 at 10%. July 2022 at 14.8%. Each reading marked a point where fear was fully in charge and forced selling ruled the tape.

The beauty of those moments is that deep value thrives in chaos. These are the points when price has completely disconnected from any rational appraisal of quality. It is where we find the banks trading at half of tangible book. It is where we see energy names priced for bankruptcy even though they have growing cash flow and manageable leverage. It is where sound companies in boring industries get thrown out because someone somewhere needed cash. When the percentage above the 200 day drops into the teens you have the perfect combination of forced selling and emotional exhaustion that deep value investors wait for.

There is a second lesson here. Deep value tells us what to buy. Momentum extremes tell us when to buy it. The combination gives you a complete system with two independent signals confirming each other. You avoid value traps because you let the selling run its course. You avoid paying up because the value screen keeps you in companies that already trade far below intrinsic worth. You also get a natural defense against the psychological pressure that wrecks most investors. You do not have to guess when the bottom is in. You wait for the percentage to collapse. You wait for the value list to swell. Then you step in.

Every one of the historical readings below 15% produced a powerful recovery. That is not my opinion. That is market history. The combination of washed out momentum and deep value entry points created multiyear returns that made careers. The hard part is accepting that the best bargains always appear when it feels like the world is ending. The signal exists to remind us that the end of the world is rarely the end of the world.

There is another way this indicator helps. When the percentage of stocks above the 200 day soars and everyone feels fantastic you know that bargains are scarce. Deep value names begin to disappear from the screen. Insider buying slows. Credit spreads tighten to almost silly levels. Markets do not crash from cheap prices. They crash from high prices. When momentum measures are stretched and value opportunities are thin it is a good time to hold cash and let the trend run without chasing it.

The result is a complete framework. You use deep value to maintain a list of companies that meet your quality and valuation criteria. You use momentum extremes to tell you when the odds favor pressing the buy button or tightening the belt. It keeps you patient in good times and aggressive in bad times. It gives you the discipline to act when others freeze and it keeps you from reaching when others lose their minds on the upside.

The market always rotates between greed and fear. Deep value thrives in fear. Momentum extremes expose the exact moments fear has reached maximum strength. That is the combination that wins. Through every cycle this simple pairing has worked. It does not require complicated math. It does not require high frequency anything. It requires patience, discipline, and a willingness to endure a little discomfort in exchange for very large payoffs.

That is our game. That is how we invest. A calm mind, a value screen, and a clean read on the market’s emotional state. Deep value tells us what to buy and the 200 day breadth signal tells us exactly when the crowd has lost its grip. Put those two together and you end up with a strategy that has survived every storm markets have thrown at us.

If you want to beat the market you have to buy what no one else wants at the moment no one else is willing to act. This combination makes those moments obvious and investable. That is why we use it. It works.