At some point, inflation
Sometimes it's useful to look beyond the current headlines to what may be coming over the next 3 to 5 years.
From my vantage point, what I see coming is inflation.
Currently, the news is filled with signs of deflation. Asset prices are collapsing. Housing prices are down significantly. Almost anything, other than U.S. Treasury securities, seems to be down over the last year.
Commodities have been particularly hard hit. It wasn't that long ago that oil was at $147 per barrel and people were talking about it going over $200. Now, it's below $40.
But, what has changed? Mostly, demand has dropped dramatically. As Economics 101 will tell you, when the demand curve shifts down and the supply curve stays the same, you get lower prices. I think I can safely say that has happened.
So, why had demand been crushed. In a word, deleveraging. The economy as a whole--businesses and consumers, at least--have been paying back debts to keep from going bankrupt. Not everyone is succeeding.
This reduction in debt has led to a tremendous fall-off in demand for goods and services of all sorts. You can see that clearly in the GDP and employment numbers. For those those who thought only Wall Street was in trouble, take another look.
But, the biggest debtor out there--the U.S. government--has been borrowing and printing money like it's going out of style.
Eventually, such borrowing and printing will get credit markets going. And, when they do, we'll all owe a lot more debt and have a lot more dollars chasing the same number of goods. In other words, inflation.
I don't think it will happen soon. Although the Fed is printing money and Congress is finding all kinds of ways to spend it, economic activity has slowed down so much that all it's doing is making deflation happen less quickly. Eventually, and over the next several years, economic activity will pick back up again and this will be visible in the so-called velocity of money.
When that happens, the demand curve will shift back up and prices will recover. But--and there's always a but--the government will be in a lot more debt and there will be a lot more dollars chasing the same amount of demand.
In 3 to 5 years, and perhaps sooner, the news won't be about deflation, but inflation. And, that inflation will be a lot higher than in the 80's, 90's or 00's. In fact, it wouldn't surprise me to see $300 a barrel oil and double digit inflation rates (not the core rate, but including food and energy).
With that in mind, you may want to consider inflation-proofing your portfolio over the coming years. Think about companies that can jack up their prices and customers will still pay. Think about commodity producing companies. Be wary of bonds with low payouts or higher risk of default.
It may not happen right away, but over the next several years, get prepared for inflation.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, December 19, 2008
Friday, December 12, 2008
Keeping your head in trying times
The hardest part of watching the stock market recently has been keeping things in the right context.
The stock market is not a crystal ball that reveals a company's true worth. It merely shows what people are willing to buy and sell partial ownership of companies at any point in time.
But who is buying and who is selling?
Are sellers under pressure because they bought with borrowed money? Are they professional investors who are selling because their customers are cashing out in a panic?
Are buyers carefully considering the value of companies? Are they waiting to see what the government or other buyers and sellers will do next?
Markets do not reveal underlying worth, they simply reveal what people are willing to pay at a point in time. But, those assessments change over time--sometimes dramatically.
The way I'm keeping my head in these difficult times is to look past stock prices at the underlying businesses I own. Such businesses are in good shape and have bright futures.
Focusing on the underlying business is key to keeping your head. It allows the market to be your servant instead of your master.
Right now, and for some time to come I think, that servant will provide wonderful bargains on great companies.
As long as you look past the price at the underlying business, you too can keep your head and benefit from trying times.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
The hardest part of watching the stock market recently has been keeping things in the right context.
The stock market is not a crystal ball that reveals a company's true worth. It merely shows what people are willing to buy and sell partial ownership of companies at any point in time.
But who is buying and who is selling?
Are sellers under pressure because they bought with borrowed money? Are they professional investors who are selling because their customers are cashing out in a panic?
Are buyers carefully considering the value of companies? Are they waiting to see what the government or other buyers and sellers will do next?
Markets do not reveal underlying worth, they simply reveal what people are willing to pay at a point in time. But, those assessments change over time--sometimes dramatically.
The way I'm keeping my head in these difficult times is to look past stock prices at the underlying businesses I own. Such businesses are in good shape and have bright futures.
Focusing on the underlying business is key to keeping your head. It allows the market to be your servant instead of your master.
Right now, and for some time to come I think, that servant will provide wonderful bargains on great companies.
As long as you look past the price at the underlying business, you too can keep your head and benefit from trying times.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, December 05, 2008
Things are looking up
I'm not a market timer, but when market sentiment is as negative as it is now, it's not a bad idea to look for the silver lining which may mean things are improving.
Today, new unemployment claims came in at over 500,000, the worst report since the brutal 1974 recession. After these figures are fully adjusted over the next several years, it would not surprise me to see this number close to 1,000,000.
How is that good news? Because the market is up today!
When extremely negative numbers come out about the economy and the stock market doesn't go down by much or even goes up, it means people have fully grasped how negative things are and are starting to look for a future recovery.
That doesn't mean the market has bottomed or that all the bad news has been announced. But, it does mean that market participants are recognizing how bad things are and are perhaps seeing that things won't be so bad in the future.
Added to this, employment figures are a lagging indicator. That means that employment figures tend to look worst near stock market bottoms. Employment is a reaction to economic conditions, not a forecaster of them. Employment figures look bad when employers are throwing in the towel and laying people off. This is usually when the stock market begins to recover.
Why? Because the stock market is a forecasting mechanism. The price of a stock should be equal to all future cash flows. Prices shouldn't reflect current conditions, or even conditions over the near term, but should reflect all future possibilities of a company.
That's why the stock market tends to recover long before the economy, and why waiting for economic figures to improve is a sure fire way to miss out on huge market rallies.
I don't know if the stock market will go up next week, month or year, but I do know that many companies are trading at depression levels even though they have bright futures.
In other words, the best bargains in 25 years can be found right now, if you can see the silver lining.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
I'm not a market timer, but when market sentiment is as negative as it is now, it's not a bad idea to look for the silver lining which may mean things are improving.
Today, new unemployment claims came in at over 500,000, the worst report since the brutal 1974 recession. After these figures are fully adjusted over the next several years, it would not surprise me to see this number close to 1,000,000.
How is that good news? Because the market is up today!
When extremely negative numbers come out about the economy and the stock market doesn't go down by much or even goes up, it means people have fully grasped how negative things are and are starting to look for a future recovery.
That doesn't mean the market has bottomed or that all the bad news has been announced. But, it does mean that market participants are recognizing how bad things are and are perhaps seeing that things won't be so bad in the future.
Added to this, employment figures are a lagging indicator. That means that employment figures tend to look worst near stock market bottoms. Employment is a reaction to economic conditions, not a forecaster of them. Employment figures look bad when employers are throwing in the towel and laying people off. This is usually when the stock market begins to recover.
Why? Because the stock market is a forecasting mechanism. The price of a stock should be equal to all future cash flows. Prices shouldn't reflect current conditions, or even conditions over the near term, but should reflect all future possibilities of a company.
That's why the stock market tends to recover long before the economy, and why waiting for economic figures to improve is a sure fire way to miss out on huge market rallies.
I don't know if the stock market will go up next week, month or year, but I do know that many companies are trading at depression levels even though they have bright futures.
In other words, the best bargains in 25 years can be found right now, if you can see the silver lining.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, November 21, 2008
Market prices are only relevant if you have to sell
Andy Kessler wrote an excellent opinion piece that appeared in the Wall Street Journal yesterday. His article was titled "Ignore the Stock Market Until February."
His basic point is that a lot of selling in the stock market over the last 2 months has been due to reasons other than a rational assessment of investment merit.
He goes on to list the reasons why many people have been selling:
- tax loss selling - selling to book losses, thus reducing taxes
- mutual fund redemptions - people selling mutual funds cause the effected money manager to have to sell something, and such managers tend to chose things that have gone down the least
- mutual fund cap-gain distributions - investors are selling to pay their capital gains taxes
- hedge fund redemptions - just like mutual fund managers, hedge funds facing redemptions have to sell something, and they are choosing to sell things that have gone down the least
- margin calls - people, both individual and institutional investors, who bought stocks on margin are selling to cover margin calls as stocks go down--the so-called process of de-leveraging
I'll add another thing to that list--stop loss orders. People who think that putting in stop loss orders will save them from losses are having their stop loss orders triggered over and over again as the market goes down. This tends to be sell-reinforcing on the way down.
The result is a bunch of forced selling that is causing the stock market to go down more than it otherwise would. This may seem bad, but it's actually a good thing. (If there were a self-reinforcing cycle that made flat screen TVs go down in price, we'd be tickled pink because the value of the TV to us doesn't go down as the price does--how are stocks different?)
Why are declining stock prices good? Because that means the stocks being sold are getting pushed down to lows they would not otherwise hit. The underlying value of the business isn't changing, just the quoted price other people want to buy/sell it. If you hold a company whose price has gone down, you are free to disagree with the market by not selling, or even buying.
As long as you don't have to sell, the current market quote isn't relevant.
Only when you have to sell are market prices relevant. If you don't have to sell, you don't have to book losses. And, if you don't have to book losses, then you haven't really lost anything, yet.
Benjamin Graham once said the market should serve you, not be your master. Right now, the market is serving up unbelievable discounts on some of the best companies around. This is a great time to buy, or a great chance to sell things that haven't gone down and buy great companies that have gone down significantly.
Kessler makes the point that the market will continue to go down in December as tax loss harvesting continues and leverage is unwound. In January, a bunch of money managers will get fired for lousy performance, and the new managers will be selling in January to get rid of the previous manager's mistakes. That means market prices are likely to be far off underlying values until at least February.
That means you have 2 months--2 glorious, happy months--to buy into the best bargains seen in almost 25 years. I've never been so excited about future returns.
When February comes, I'll be well positioned to benefit, and so will my clients.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Andy Kessler wrote an excellent opinion piece that appeared in the Wall Street Journal yesterday. His article was titled "Ignore the Stock Market Until February."
His basic point is that a lot of selling in the stock market over the last 2 months has been due to reasons other than a rational assessment of investment merit.
He goes on to list the reasons why many people have been selling:
- tax loss selling - selling to book losses, thus reducing taxes
- mutual fund redemptions - people selling mutual funds cause the effected money manager to have to sell something, and such managers tend to chose things that have gone down the least
- mutual fund cap-gain distributions - investors are selling to pay their capital gains taxes
- hedge fund redemptions - just like mutual fund managers, hedge funds facing redemptions have to sell something, and they are choosing to sell things that have gone down the least
- margin calls - people, both individual and institutional investors, who bought stocks on margin are selling to cover margin calls as stocks go down--the so-called process of de-leveraging
I'll add another thing to that list--stop loss orders. People who think that putting in stop loss orders will save them from losses are having their stop loss orders triggered over and over again as the market goes down. This tends to be sell-reinforcing on the way down.
The result is a bunch of forced selling that is causing the stock market to go down more than it otherwise would. This may seem bad, but it's actually a good thing. (If there were a self-reinforcing cycle that made flat screen TVs go down in price, we'd be tickled pink because the value of the TV to us doesn't go down as the price does--how are stocks different?)
Why are declining stock prices good? Because that means the stocks being sold are getting pushed down to lows they would not otherwise hit. The underlying value of the business isn't changing, just the quoted price other people want to buy/sell it. If you hold a company whose price has gone down, you are free to disagree with the market by not selling, or even buying.
As long as you don't have to sell, the current market quote isn't relevant.
Only when you have to sell are market prices relevant. If you don't have to sell, you don't have to book losses. And, if you don't have to book losses, then you haven't really lost anything, yet.
Benjamin Graham once said the market should serve you, not be your master. Right now, the market is serving up unbelievable discounts on some of the best companies around. This is a great time to buy, or a great chance to sell things that haven't gone down and buy great companies that have gone down significantly.
Kessler makes the point that the market will continue to go down in December as tax loss harvesting continues and leverage is unwound. In January, a bunch of money managers will get fired for lousy performance, and the new managers will be selling in January to get rid of the previous manager's mistakes. That means market prices are likely to be far off underlying values until at least February.
That means you have 2 months--2 glorious, happy months--to buy into the best bargains seen in almost 25 years. I've never been so excited about future returns.
When February comes, I'll be well positioned to benefit, and so will my clients.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, November 14, 2008
"buy some good stock and hold it till it goes up"
I recently got back from a trip to Rome. Wow, what an amazing place. I've spent the last several years learning all about ancient Rome, and making a trip there really capped it off nicely.
On part of the plane ride back, for there were many legs, I sat next to a nice man who is an architect.
In conversation, it came up that I was a professional investor. He commented that this must be a terrible time to be in this field, and I retorted that it's a wonderful time because I'm good at what I do and the opportunities are legendary.
His response was that someone who sold several months ago would have proven brilliant.
I didn't respond because I was dumb-founded that someone who seemed so intelligent was suffering from such powerful case of hindsight bias.
It reminded me of the Will Rogers quote, "take all your saving and buy some good stock and hold it till it goes up, then sell it. If it doesn't go up, don't buy it."
Of course, Rogers was making fun of the concept of hindsight bias. He was poking fun at the people who think you can successfully invest by only buying things that went up in hindsight.
But, most investors seem to think that's the way to make money. Just sell at the top and buy at the bottom. The problem is that no one can do this consistently. Some people have done it because they were lucky once or twice, but no one does it consistently. Even worse, the people who try are almost always doing worse than someone who just buys and holds.
People who try to sell at the top and buy at the bottom end up guessing on the roll of a die and either getting lucky or unlucky. That's not investing wisdom.
A smart weather predictor doesn't try to boldly guess the weather. They look at the facts, consult a lot of data, read a lot of history, and make judgments based on hours of analysis. And, even then, they use percentages to forecast how likely certain weather phenomenon are to occur.
The stock market is even more difficult to predict than the weather. There aren't any successful investors who time the market, just like there aren't any successful weather predictors who guess about the weather.
The secret isn't to look into the past and wish you had timed things perfectly. The secret is to do analysis, consult history, and make bets where the odds are heavily in your favor--even though you don't know exactly what will happen.
The people who try to sell high and buy low almost always end up doing the opposite, and their investing results and overall wealth reflect that strategy.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
I recently got back from a trip to Rome. Wow, what an amazing place. I've spent the last several years learning all about ancient Rome, and making a trip there really capped it off nicely.
On part of the plane ride back, for there were many legs, I sat next to a nice man who is an architect.
In conversation, it came up that I was a professional investor. He commented that this must be a terrible time to be in this field, and I retorted that it's a wonderful time because I'm good at what I do and the opportunities are legendary.
His response was that someone who sold several months ago would have proven brilliant.
I didn't respond because I was dumb-founded that someone who seemed so intelligent was suffering from such powerful case of hindsight bias.
It reminded me of the Will Rogers quote, "take all your saving and buy some good stock and hold it till it goes up, then sell it. If it doesn't go up, don't buy it."
Of course, Rogers was making fun of the concept of hindsight bias. He was poking fun at the people who think you can successfully invest by only buying things that went up in hindsight.
But, most investors seem to think that's the way to make money. Just sell at the top and buy at the bottom. The problem is that no one can do this consistently. Some people have done it because they were lucky once or twice, but no one does it consistently. Even worse, the people who try are almost always doing worse than someone who just buys and holds.
People who try to sell at the top and buy at the bottom end up guessing on the roll of a die and either getting lucky or unlucky. That's not investing wisdom.
A smart weather predictor doesn't try to boldly guess the weather. They look at the facts, consult a lot of data, read a lot of history, and make judgments based on hours of analysis. And, even then, they use percentages to forecast how likely certain weather phenomenon are to occur.
The stock market is even more difficult to predict than the weather. There aren't any successful investors who time the market, just like there aren't any successful weather predictors who guess about the weather.
The secret isn't to look into the past and wish you had timed things perfectly. The secret is to do analysis, consult history, and make bets where the odds are heavily in your favor--even though you don't know exactly what will happen.
The people who try to sell high and buy low almost always end up doing the opposite, and their investing results and overall wealth reflect that strategy.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, October 31, 2008
How low can you go?
A lot people are wondering how bad the stock market can get.
I don't know how low it will go, but I have a pretty good idea of how low it can go.
Before I outline my reasoning, let me forewarn you: the answer is ugly.
I'm not trying to predict what the market will do or when--no one really can. I'm just trying to prepare you for the worst case scenario just in case it happens.
You don't want to sell at the bottom. Nothing will hose up your long term goals as much as going to cash in hopes you can sell at the top and buy at the bottom. The odds are highly in favor of you doing just the opposite--most people do. Knowing how bad things can get may help you avoid selling at the bottom, and that's what I'm trying to do in this blog.
The reality is I've never been as bullish as I am now. I'm projecting the highest returns going forward I've seen in 13 years! I'm terribly excited about the returns I believe I'll get over the next 5 years. But, and there's always a but, the stock market could go a lot lower before it goes back up again.
How low? History indicates the market can get as low as 7 times normalized earnings. I've talked about normalized earnings in the past, but let me explain it again briefly.
The stock market's per share earnings have grown quite steadily at around 6% a year over the last 50+ years. In boom times earnings are above this trend, and in bust times earnings are below. But, over time, the earnings always return to trend.
Such earnings are like true north to a navigator. They point the way in all circumstances and provide a ready reference for where you are and where you're going.
That's why I use normalized earnings--it's a steady guide. In boom times, the stock market sells at over 20 times earnings. In bust times, it tends to go down below 10 times earnings. In the worst times, it gets down to around 7 times normalized earnings.
What would 7 times normalized earnings mean for the S&P 500? Normalized earnings in the next year for the S&P 500 will be around $67 a share. 7 times that gives you a value of $469 for the S&P 500, roughly 52% below today's closing price of around $970 on the S&P 500. That would correlate to a Dow Jones Industrial Average of $4,500.
I'm not saying we'll get that low. In fact, I consider that quite unlikely. I'm not saying I want to see it go that low--I'd feel terrible if it did. But, I am saying be prepared for it to go that low just in case it does.
Benjamin Graham, the father of value investing, once said you shouldn't invest in the stock market unless you're ready to see your investment cut in half and double in value. I agree with that sentiment. Be prepared for the worst, hope for the best.
On a brighter note, the stock market usually trades at an average of 15 times normalized earnings. That would mean an S&P 500 of around $1,000 and a Dow of $9,600. In other words, the market is already below fair value.
The problem is the stock market almost always goes below fair value after boom times. It already has, but could go lower still. Be prepared for how low it can go and don't sell at the bottom.
Like I said above, I'm finding the best values I've found in years. Great companies are selling at prices that are likely to generate very high returns over the long run. Even if things go significantly lower, this is an absolutely great time to invest!
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
A lot people are wondering how bad the stock market can get.
I don't know how low it will go, but I have a pretty good idea of how low it can go.
Before I outline my reasoning, let me forewarn you: the answer is ugly.
I'm not trying to predict what the market will do or when--no one really can. I'm just trying to prepare you for the worst case scenario just in case it happens.
You don't want to sell at the bottom. Nothing will hose up your long term goals as much as going to cash in hopes you can sell at the top and buy at the bottom. The odds are highly in favor of you doing just the opposite--most people do. Knowing how bad things can get may help you avoid selling at the bottom, and that's what I'm trying to do in this blog.
The reality is I've never been as bullish as I am now. I'm projecting the highest returns going forward I've seen in 13 years! I'm terribly excited about the returns I believe I'll get over the next 5 years. But, and there's always a but, the stock market could go a lot lower before it goes back up again.
How low? History indicates the market can get as low as 7 times normalized earnings. I've talked about normalized earnings in the past, but let me explain it again briefly.
The stock market's per share earnings have grown quite steadily at around 6% a year over the last 50+ years. In boom times earnings are above this trend, and in bust times earnings are below. But, over time, the earnings always return to trend.
Such earnings are like true north to a navigator. They point the way in all circumstances and provide a ready reference for where you are and where you're going.
That's why I use normalized earnings--it's a steady guide. In boom times, the stock market sells at over 20 times earnings. In bust times, it tends to go down below 10 times earnings. In the worst times, it gets down to around 7 times normalized earnings.
What would 7 times normalized earnings mean for the S&P 500? Normalized earnings in the next year for the S&P 500 will be around $67 a share. 7 times that gives you a value of $469 for the S&P 500, roughly 52% below today's closing price of around $970 on the S&P 500. That would correlate to a Dow Jones Industrial Average of $4,500.
I'm not saying we'll get that low. In fact, I consider that quite unlikely. I'm not saying I want to see it go that low--I'd feel terrible if it did. But, I am saying be prepared for it to go that low just in case it does.
Benjamin Graham, the father of value investing, once said you shouldn't invest in the stock market unless you're ready to see your investment cut in half and double in value. I agree with that sentiment. Be prepared for the worst, hope for the best.
On a brighter note, the stock market usually trades at an average of 15 times normalized earnings. That would mean an S&P 500 of around $1,000 and a Dow of $9,600. In other words, the market is already below fair value.
The problem is the stock market almost always goes below fair value after boom times. It already has, but could go lower still. Be prepared for how low it can go and don't sell at the bottom.
Like I said above, I'm finding the best values I've found in years. Great companies are selling at prices that are likely to generate very high returns over the long run. Even if things go significantly lower, this is an absolutely great time to invest!
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, October 24, 2008
Hanging in there is tough, no doubt about it
October has been a brutal month.
I saw this crisis coming years ago, and my returns have benefited from that foresight, but this hasn't kept me from feeling the pain.
I was feeling pretty good about myself at the end of September. Having beat the market by more 8% over the last two years and by more than 4% over the last three years (annualized, after fees), I was feeling pretty cocky.
But, that was before October. In October, my returns have paralleled the market's path down. I haven't enjoyed the ride, even if I started from a higher place.
This has been particularly frustrating because I've invested in some of the strongest companies around. You'd think the strongest businesses would be untouched, or much less touched, by recent turmoil.
That hasn't been the case. When people are under a lot of pain, they do crazy things, like selling great companies at huge discounts to underlying value. Many of those investors were probably buying on margin. Some were hedge funds that were forced to sell long positions and cover short sales after the SEC banned shorting certain companies.
What's been happening is the usual capitulation you tend to see when markets are bottoming. People are under so much pain that they're selling everything, regardless of the price they're getting.
This isn't fun for a value investor like me because I hate to see my clients' money or my own money decline in value. I work hard to be sheltered by the storm, even though I know some markets are so brutal that everything goes down.
What's a person to do? I'm on a buying spree.
I'm taking the opportunity to sell strong performers and buy poorly performing great companies. I'm finding some absolutely astounding bargains and, most likely, boosting future returns. And, although it's no fun to see the market and portfolios go down dramatically, I'm having a lot of fun putting things in place to benefit when the market does recover.
When will the market recover? No one knows. The market could go down by another 33% to hit historical lows reached in the past, or it could rally by 67% (a 40% decline requires a 67% increase to get back to break even) as it's also done in the past.
You don't need to be a fortune teller or have a crystal ball to make money from here, you just need the gut wrenching fortitude to buy great companies at great prices--now. As long as you believe our economy won't permanently collapse, this is a great time to invest.
Although it's no fun to live through, I'm quite confident that buying at times like this make for very high long term returns in the future.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
October has been a brutal month.
I saw this crisis coming years ago, and my returns have benefited from that foresight, but this hasn't kept me from feeling the pain.
I was feeling pretty good about myself at the end of September. Having beat the market by more 8% over the last two years and by more than 4% over the last three years (annualized, after fees), I was feeling pretty cocky.
But, that was before October. In October, my returns have paralleled the market's path down. I haven't enjoyed the ride, even if I started from a higher place.
This has been particularly frustrating because I've invested in some of the strongest companies around. You'd think the strongest businesses would be untouched, or much less touched, by recent turmoil.
That hasn't been the case. When people are under a lot of pain, they do crazy things, like selling great companies at huge discounts to underlying value. Many of those investors were probably buying on margin. Some were hedge funds that were forced to sell long positions and cover short sales after the SEC banned shorting certain companies.
What's been happening is the usual capitulation you tend to see when markets are bottoming. People are under so much pain that they're selling everything, regardless of the price they're getting.
This isn't fun for a value investor like me because I hate to see my clients' money or my own money decline in value. I work hard to be sheltered by the storm, even though I know some markets are so brutal that everything goes down.
What's a person to do? I'm on a buying spree.
I'm taking the opportunity to sell strong performers and buy poorly performing great companies. I'm finding some absolutely astounding bargains and, most likely, boosting future returns. And, although it's no fun to see the market and portfolios go down dramatically, I'm having a lot of fun putting things in place to benefit when the market does recover.
When will the market recover? No one knows. The market could go down by another 33% to hit historical lows reached in the past, or it could rally by 67% (a 40% decline requires a 67% increase to get back to break even) as it's also done in the past.
You don't need to be a fortune teller or have a crystal ball to make money from here, you just need the gut wrenching fortitude to buy great companies at great prices--now. As long as you believe our economy won't permanently collapse, this is a great time to invest.
Although it's no fun to live through, I'm quite confident that buying at times like this make for very high long term returns in the future.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, October 17, 2008
Warren Buffett is buying American stocks
I'm not the only one feeling more bullish lately--so is Warren Buffett (yeh, I'm flattering myself).
Warren Buffett is the richest man in the world and probably the best investor alive today. To top it off, he seems like a grounded, happy guy. He still lives in the house he bought in his 30's, still drives himself around town, and has good relationships with his kids. Pretty amazing for a multi-billionaire.
Buffett wrote a letter to the editor of the New York Times that was published today titled "Buy American. I Am." You can access it here to read the whole thing.
Buffett's basic argument is that because the financial world is a mess, this is a historic time to buy American stocks.
He cautions that unemployment will rise, business activity will slow and headlines will be scary. Despite these issues, he's buying stocks in his personal account (not just for Berkshire Hathaway, the holding company he runs). Up until recently, his personal money was all is U.S. government bonds. But soon, he will be 100% invested in U.S. equities.
As Buffett has said many times before, "Be fearful when others are greedy, and be greedy when others are fearful." In other words, buy when everyone is scared and sell when everyone is euphoric. This is very difficult to do, but it is also very profitable.
He cautions against investing in highly leveraged companies and businesses with weak competitive advantages. He also cautions that he can't predict short term movements in the stock market. Let me let you in on a secret--no one can!!! It may keep going down over the next year or two, but in 5 years, it's the best place to invest (especially at today's low prices).
Buffett is seldom if ever outright bullish. But, when he says, "What is likely...is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up," I stand up and listen. What he's saying is you can't wait until things look good to invest, because by then you'll have missed significant gains. I've rarely, if ever, heard Buffett say something so bullish. The last time he seemed to be this optimistic was 1982, and that was an outstanding time to invest.
He goes on to give examples of why waiting doesn't work. During the Great Depression, the stock market bottomed in the summer of 1932, long before the economic picture improved. During World War II, the market bottomed in the spring of 1942, long before it was clear the Allies would defeat Axis powers. In the early 1980's, when inflation was double-digit and the economy was in a deep, double-dip recession, the time to buy was in 1982, long before the economy's recovery was clear in 1983 and 1984.
The lesson from a guy who has generated 20%+ returns for over 50 years is: you buy when everyone is pessimistic, and that time is NOW!
He warns that buying stocks only when you feel comfortable leads to poor results, so does selling because you feel scared.
He also warns against sitting in cash. Holding cash now feels comfortable, but it's an unwise investment decision. Cash doesn't pay much of a return, especially now, and it will depreciate in value. As he warns, government policies directed at alleviating the current crisis will probably prove inflationary and make cash an even worse investment.
He believes that "[e]quities will almost certainly outperform cash over the next decade, probably by a substantial degree." You should invest for where things are going, not for where they are today.
At a time when people are looking for something to hang their hopes on, Warren Buffett is a voice of clarity in the maelstrom. I'm listening, and so should you.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
I'm not the only one feeling more bullish lately--so is Warren Buffett (yeh, I'm flattering myself).
Warren Buffett is the richest man in the world and probably the best investor alive today. To top it off, he seems like a grounded, happy guy. He still lives in the house he bought in his 30's, still drives himself around town, and has good relationships with his kids. Pretty amazing for a multi-billionaire.
Buffett wrote a letter to the editor of the New York Times that was published today titled "Buy American. I Am." You can access it here to read the whole thing.
Buffett's basic argument is that because the financial world is a mess, this is a historic time to buy American stocks.
He cautions that unemployment will rise, business activity will slow and headlines will be scary. Despite these issues, he's buying stocks in his personal account (not just for Berkshire Hathaway, the holding company he runs). Up until recently, his personal money was all is U.S. government bonds. But soon, he will be 100% invested in U.S. equities.
As Buffett has said many times before, "Be fearful when others are greedy, and be greedy when others are fearful." In other words, buy when everyone is scared and sell when everyone is euphoric. This is very difficult to do, but it is also very profitable.
He cautions against investing in highly leveraged companies and businesses with weak competitive advantages. He also cautions that he can't predict short term movements in the stock market. Let me let you in on a secret--no one can!!! It may keep going down over the next year or two, but in 5 years, it's the best place to invest (especially at today's low prices).
Buffett is seldom if ever outright bullish. But, when he says, "What is likely...is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up," I stand up and listen. What he's saying is you can't wait until things look good to invest, because by then you'll have missed significant gains. I've rarely, if ever, heard Buffett say something so bullish. The last time he seemed to be this optimistic was 1982, and that was an outstanding time to invest.
He goes on to give examples of why waiting doesn't work. During the Great Depression, the stock market bottomed in the summer of 1932, long before the economic picture improved. During World War II, the market bottomed in the spring of 1942, long before it was clear the Allies would defeat Axis powers. In the early 1980's, when inflation was double-digit and the economy was in a deep, double-dip recession, the time to buy was in 1982, long before the economy's recovery was clear in 1983 and 1984.
The lesson from a guy who has generated 20%+ returns for over 50 years is: you buy when everyone is pessimistic, and that time is NOW!
He warns that buying stocks only when you feel comfortable leads to poor results, so does selling because you feel scared.
He also warns against sitting in cash. Holding cash now feels comfortable, but it's an unwise investment decision. Cash doesn't pay much of a return, especially now, and it will depreciate in value. As he warns, government policies directed at alleviating the current crisis will probably prove inflationary and make cash an even worse investment.
He believes that "[e]quities will almost certainly outperform cash over the next decade, probably by a substantial degree." You should invest for where things are going, not for where they are today.
At a time when people are looking for something to hang their hopes on, Warren Buffett is a voice of clarity in the maelstrom. I'm listening, and so should you.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, October 10, 2008
It's normal to worry, but this is not the time to panic
Below is a slightly altered version of an email I recently sent to clients:
Dear Clients,
As you'll see next week, my client letter was written at quarter end and doesn't address recent market volatility. With that in mind and considering the recent market drop, I decided to throw together a quick email to all clients giving my opinion of what is happening and what my response is.
I've summarized my thinking in quick bullet points for those short on time or not as interested. Then below, I go into more detail on each point for those who want more info. Finally, my intent is to try to answer your questions as well as I can and to get a dialogue going if you are concerned. Please feel free to contact me at any time if you want to talk to me about what is going on. I will be available or quickly return your calls. This is a stressful time, and I'm here to answer your questions.
1. It's natural to be worried, but panic selling now will lead to regret in the long run.
2. Historically, this decline is not out of the ordinary.
3. I believe recent government action will work, although it will take some time and it will lead to higher inflation in the long run.
4. It's not possible to time the market, so trying to sell now and buy at the "bottom" almost always leads to worse results than holding on.
5. The market is throwing the baby out with the bathwater.
6. Our underlying businesses are strong even though their prices are going down.
7. This is a historic time to invest!
8. One of the reasons you hired me is to let me worry about the market for you. That's what I'm trying to do for you now.
Now, the details.
1. It's natural to be worried, but panic selling now will lead to regret in the long run.
Being worried is normal--I'm having no fun watching your and my portfolios decline. It's easy to anchor on recent market tops and expect the highs to continue--there was a lot of media coverage about the Dow hitting 14,000 this time last year. People are panicking because they are scared, but reacting by selling is the worst investment plan and will lead to tremendous regret when the market does rebound. Temporary highs and lows can make you feel better and worse than you want to. The market swings up and down dramatically, so it's best to focus on longer term averages. A wise person once said that courage is not the lack of fear, it's the ability to act in the face of fear. Right now, not selling is taking a lot of courage.
2. Historically, this decline is not out of the ordinary.
The stock market tends to decline an average of 40% when recessions hit, which is about every 5-10 years. We're down around 40%, so this decline is in line with history. As Mark Twain said, history doesn't repeat, but it sure does rhyme. Sometimes the market goes down by 20%, sometimes it goes down by more. No one knows where this one will bottom, and trying to pick the bottom is a fool's errand. Our economy and financial sector are facing the worst period since the Great Depression, but that doesn't mean it will look just like the Great Depression. Comparisons to history are useful, but expecting the same outcomes in the same way is a mistake.
3. I believe recent government action will work, although it will take some time and it will lead to higher inflation in the long run.
Current government plans have flaws, but I believe they will get credit markets and the economy going, eventually. The cost will be higher long term inflation and more regulation, but I do think it will work. The market tends to bottom 6-9 months before the economy does. Economic data comes out months and years after the economic bottom is clearly reached. Waiting for the economy to improve will lead you to miss the huge stock market rebound that will occur. It's hard to see past our current turmoil, but a long term focus helps.
4. It's not possible to time the market, so trying to sell now and buy at the "bottom" almost always leads to worse results than holding on.
Like the search for the Holy Grail and a perpetual motion machine, people are always trying to time the market by buying at the bottom and selling at the top. Unfortunately, this isn't possible, and every attempt to do so ends in tears. I remember buying a company called JLG in 2000 at $8.88 per share, watching it decline to $3.95, and then selling it when it climbed above $17. I had doubled my money when the market was doing terribly, so I felt good about myself. But then JLG climbed to $60. It's easy, in hindsight, to think I should have known that JLG was worth a lot more than $3.95 at the bottom and buy more. It's easy to think I should have waited for $60 to sell at the top. Having been through that ride, though, I know very well that it's not possible to pick the tops and bottoms. Instead, I focus on the underlying value of the business and buy when it goes down and sell when it goes up. I never pick the exact bottom or top, but over the long run, I've had very good results.
5. The market is throwing the baby out with the bathwater.
When the market panics, everyone feels so much pain they sell no matter what price they get. This leads people to throw the baby out with the bathwater, and that is what I've been seeing since Oct 1st. People are selling good companies and bad ones, small and big, everything. When that happens, it's very unprofitable to join the crowd and sell, too. This is a sign of how much pain people are in, not the underlying value of businesses. In the long run, the market will recognize underlying business value, even if it takes a while and some pain to get there.
6. Our underlying businesses are strong even though their prices are going down.
When I look at our underlying businesses, I feel very confident. Software companies will continue to sell software and make money, even in a down market. People will still subscribe to cable, even if they don't pay for HBO anymore. Smart insurance companies will continue to write insurance. Discount retailers are doing better than ever as people look for bargains. Europe's lowest cost airline is still lowest cost and, and with little debt, can continue doing business and make more money than competitors, smart holding companies have investment money on the sidelines and the inside scoop on the best deals in the market when everyone else has no cash to invest, well capitalized insurers are writing more insurance now that AIG and other insurance companies are in severe trouble, big pharmaceutical companies will continue to sell drugs to people who need the medicine to live longer, happier lives, great banks are expanding by buying competitors at a fire-sale price because most other banks are on the ropes, auto insurers will continue selling car insurance because people have to buy it to drive, smart chemical companies will continue to make vital chemicals and pay lower prices for gas and oil inputs, large integrated oil companies will continue producing and refining fuel for people who will continue to heat their homes and drive their cars, large international banks will continue to grow their international banking franchises and will be able to buy up competitors because they are more conservatively financed than competitors. Many companies are strong and exploiting the downturn--but their prices are going down! Why? Because people are panicking, not because the businesses are going bankrupt.
7. This is a historic time to invest!
If you look back at market history and see 2002, 1998, 1991, 1987, 1982, 1974, 1962, 1953, 1942, 1938, 1932, etc., you will see market bottoms where things were awful. 2002 was the bottom of the tech blowout. 1998 was the bottom of the Asian Contagion. 1991 was the Saving and Loan bailout and recession. In 1987, the market dropped over 20% in one day! 1982 was a sharp recession and the Time magazine article of the "End of Equities." 1974 was a terrible recession, extremely high inflation, the pullout of Vietnam, etc. And so on and so forth. They were each excellent times to invest and extremely tough moments to do so. What made them great times to invest? Because some people panicked and others didn't. The people who didn't panic made out like bandits. If you have extra cash to invest, put it to work now. If you don't, hold on for now. The roller coaster is on the way down, our stomach is in our throat, we know it will go back up again but can't think about that because we feel awful. But, holding on is the most profitable route.
8. One of the reasons you hired me is to let me worry about the market for
you. That's what I'm trying to do for you now.
An important part of my job, in addition to researching and picking investments, is to take the pain for you of watching the market go down. If you can, turn off the TV, get off the Internet, put down the business section of the newspaper. Go out and do something fun. Spend time with loved ones. I remember watching TV for 48 hours after 9/11 and after Hurricane Katrina, and I managed to convince myself that more doom was right around the corner. It wasn't, and it probably isn't now. Let me focus on this stuff for you, let me take the pain for you. That's what you pay me for.
I don't want to short change current events. These are tough times.
I don't want to undercut how miserable it is to watch our portfolios decline in value--I'm agonizing because I feel responsible for your money.
If you still have concerns, please call or write me. I'm standing by and waiting to talk to anyone who calls.
Take care and have a great weekend,
Mike
Michael Rivers, CFA
Athena Capital Management Corp.
719-761-3148
www.athenacapital.biz
Visit my blog: www.mikerivers.blogspot.com.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Below is a slightly altered version of an email I recently sent to clients:
Dear Clients,
As you'll see next week, my client letter was written at quarter end and doesn't address recent market volatility. With that in mind and considering the recent market drop, I decided to throw together a quick email to all clients giving my opinion of what is happening and what my response is.
I've summarized my thinking in quick bullet points for those short on time or not as interested. Then below, I go into more detail on each point for those who want more info. Finally, my intent is to try to answer your questions as well as I can and to get a dialogue going if you are concerned. Please feel free to contact me at any time if you want to talk to me about what is going on. I will be available or quickly return your calls. This is a stressful time, and I'm here to answer your questions.
1. It's natural to be worried, but panic selling now will lead to regret in the long run.
2. Historically, this decline is not out of the ordinary.
3. I believe recent government action will work, although it will take some time and it will lead to higher inflation in the long run.
4. It's not possible to time the market, so trying to sell now and buy at the "bottom" almost always leads to worse results than holding on.
5. The market is throwing the baby out with the bathwater.
6. Our underlying businesses are strong even though their prices are going down.
7. This is a historic time to invest!
8. One of the reasons you hired me is to let me worry about the market for you. That's what I'm trying to do for you now.
Now, the details.
1. It's natural to be worried, but panic selling now will lead to regret in the long run.
Being worried is normal--I'm having no fun watching your and my portfolios decline. It's easy to anchor on recent market tops and expect the highs to continue--there was a lot of media coverage about the Dow hitting 14,000 this time last year. People are panicking because they are scared, but reacting by selling is the worst investment plan and will lead to tremendous regret when the market does rebound. Temporary highs and lows can make you feel better and worse than you want to. The market swings up and down dramatically, so it's best to focus on longer term averages. A wise person once said that courage is not the lack of fear, it's the ability to act in the face of fear. Right now, not selling is taking a lot of courage.
2. Historically, this decline is not out of the ordinary.
The stock market tends to decline an average of 40% when recessions hit, which is about every 5-10 years. We're down around 40%, so this decline is in line with history. As Mark Twain said, history doesn't repeat, but it sure does rhyme. Sometimes the market goes down by 20%, sometimes it goes down by more. No one knows where this one will bottom, and trying to pick the bottom is a fool's errand. Our economy and financial sector are facing the worst period since the Great Depression, but that doesn't mean it will look just like the Great Depression. Comparisons to history are useful, but expecting the same outcomes in the same way is a mistake.
3. I believe recent government action will work, although it will take some time and it will lead to higher inflation in the long run.
Current government plans have flaws, but I believe they will get credit markets and the economy going, eventually. The cost will be higher long term inflation and more regulation, but I do think it will work. The market tends to bottom 6-9 months before the economy does. Economic data comes out months and years after the economic bottom is clearly reached. Waiting for the economy to improve will lead you to miss the huge stock market rebound that will occur. It's hard to see past our current turmoil, but a long term focus helps.
4. It's not possible to time the market, so trying to sell now and buy at the "bottom" almost always leads to worse results than holding on.
Like the search for the Holy Grail and a perpetual motion machine, people are always trying to time the market by buying at the bottom and selling at the top. Unfortunately, this isn't possible, and every attempt to do so ends in tears. I remember buying a company called JLG in 2000 at $8.88 per share, watching it decline to $3.95, and then selling it when it climbed above $17. I had doubled my money when the market was doing terribly, so I felt good about myself. But then JLG climbed to $60. It's easy, in hindsight, to think I should have known that JLG was worth a lot more than $3.95 at the bottom and buy more. It's easy to think I should have waited for $60 to sell at the top. Having been through that ride, though, I know very well that it's not possible to pick the tops and bottoms. Instead, I focus on the underlying value of the business and buy when it goes down and sell when it goes up. I never pick the exact bottom or top, but over the long run, I've had very good results.
5. The market is throwing the baby out with the bathwater.
When the market panics, everyone feels so much pain they sell no matter what price they get. This leads people to throw the baby out with the bathwater, and that is what I've been seeing since Oct 1st. People are selling good companies and bad ones, small and big, everything. When that happens, it's very unprofitable to join the crowd and sell, too. This is a sign of how much pain people are in, not the underlying value of businesses. In the long run, the market will recognize underlying business value, even if it takes a while and some pain to get there.
6. Our underlying businesses are strong even though their prices are going down.
When I look at our underlying businesses, I feel very confident. Software companies will continue to sell software and make money, even in a down market. People will still subscribe to cable, even if they don't pay for HBO anymore. Smart insurance companies will continue to write insurance. Discount retailers are doing better than ever as people look for bargains. Europe's lowest cost airline is still lowest cost and, and with little debt, can continue doing business and make more money than competitors, smart holding companies have investment money on the sidelines and the inside scoop on the best deals in the market when everyone else has no cash to invest, well capitalized insurers are writing more insurance now that AIG and other insurance companies are in severe trouble, big pharmaceutical companies will continue to sell drugs to people who need the medicine to live longer, happier lives, great banks are expanding by buying competitors at a fire-sale price because most other banks are on the ropes, auto insurers will continue selling car insurance because people have to buy it to drive, smart chemical companies will continue to make vital chemicals and pay lower prices for gas and oil inputs, large integrated oil companies will continue producing and refining fuel for people who will continue to heat their homes and drive their cars, large international banks will continue to grow their international banking franchises and will be able to buy up competitors because they are more conservatively financed than competitors. Many companies are strong and exploiting the downturn--but their prices are going down! Why? Because people are panicking, not because the businesses are going bankrupt.
7. This is a historic time to invest!
If you look back at market history and see 2002, 1998, 1991, 1987, 1982, 1974, 1962, 1953, 1942, 1938, 1932, etc., you will see market bottoms where things were awful. 2002 was the bottom of the tech blowout. 1998 was the bottom of the Asian Contagion. 1991 was the Saving and Loan bailout and recession. In 1987, the market dropped over 20% in one day! 1982 was a sharp recession and the Time magazine article of the "End of Equities." 1974 was a terrible recession, extremely high inflation, the pullout of Vietnam, etc. And so on and so forth. They were each excellent times to invest and extremely tough moments to do so. What made them great times to invest? Because some people panicked and others didn't. The people who didn't panic made out like bandits. If you have extra cash to invest, put it to work now. If you don't, hold on for now. The roller coaster is on the way down, our stomach is in our throat, we know it will go back up again but can't think about that because we feel awful. But, holding on is the most profitable route.
8. One of the reasons you hired me is to let me worry about the market for
you. That's what I'm trying to do for you now.
An important part of my job, in addition to researching and picking investments, is to take the pain for you of watching the market go down. If you can, turn off the TV, get off the Internet, put down the business section of the newspaper. Go out and do something fun. Spend time with loved ones. I remember watching TV for 48 hours after 9/11 and after Hurricane Katrina, and I managed to convince myself that more doom was right around the corner. It wasn't, and it probably isn't now. Let me focus on this stuff for you, let me take the pain for you. That's what you pay me for.
I don't want to short change current events. These are tough times.
I don't want to undercut how miserable it is to watch our portfolios decline in value--I'm agonizing because I feel responsible for your money.
If you still have concerns, please call or write me. I'm standing by and waiting to talk to anyone who calls.
Take care and have a great weekend,
Mike
Michael Rivers, CFA
Athena Capital Management Corp.
719-761-3148
www.athenacapital.biz
Visit my blog: www.mikerivers.blogspot.com.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, October 03, 2008
It's ugly out there
The economy is getting to look downright ugly.
The reason why the U.S. government was working so hard on the bailout is because credit markets are frozen. For those who don't know, our economy operates mostly on credit. When most companies buy inventory, purchase property, plant and equipment, or pay wages and salaries, it's frequently done with credit.
So, when credit markets are frozen, businesses (and municipalities) can't keep operations going, they can't expand, and they can't pay their employees.
It's unclear that the government bailout will unfreeze credit markets. Banks aren't lending because their balance sheets are either close to or insolvent. They can't lend. Having the government purchase illiquid securities may facilitate the rebuilding of bank balance sheets, but it won't rebuild bank balance sheets directly.
The credit freeze has been slowing the economy remarkably over the last two months, and precipitously over the last two weeks. That is why Secretary of Treasury Paulson and Federal Reserve Chairman Bernanke have been running around like chickens with their heads cut off trying to get the bailout going.
Warren Buffett says this is the worst he's seen in his 50+ years of investing. The situation is being touted as the worse financial crisis since the Great Depression.
It's going to get worse before it gets better, but, if free markets are left alone to work, it will get better. The U.S. economy is the most dynamic and resilient in the world.
We may be over-leveraged with debt, we may have too much debt, we may not save enough, but we have the best protection of property rights and a relatively sound rule of law. That's all it takes, and individuals will do the rest.
It's always darkest before dawn. Things look pretty dark out there now. Believe it or not, that can be a great time to invest. By the time things look better, you will have missed the upswing.
I'm not saying investing at a time like this is easy, but it is smart. In the long run, investments made today will do very well, even if it's looking ugly out there right now.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
The economy is getting to look downright ugly.
The reason why the U.S. government was working so hard on the bailout is because credit markets are frozen. For those who don't know, our economy operates mostly on credit. When most companies buy inventory, purchase property, plant and equipment, or pay wages and salaries, it's frequently done with credit.
So, when credit markets are frozen, businesses (and municipalities) can't keep operations going, they can't expand, and they can't pay their employees.
It's unclear that the government bailout will unfreeze credit markets. Banks aren't lending because their balance sheets are either close to or insolvent. They can't lend. Having the government purchase illiquid securities may facilitate the rebuilding of bank balance sheets, but it won't rebuild bank balance sheets directly.
The credit freeze has been slowing the economy remarkably over the last two months, and precipitously over the last two weeks. That is why Secretary of Treasury Paulson and Federal Reserve Chairman Bernanke have been running around like chickens with their heads cut off trying to get the bailout going.
Warren Buffett says this is the worst he's seen in his 50+ years of investing. The situation is being touted as the worse financial crisis since the Great Depression.
It's going to get worse before it gets better, but, if free markets are left alone to work, it will get better. The U.S. economy is the most dynamic and resilient in the world.
We may be over-leveraged with debt, we may have too much debt, we may not save enough, but we have the best protection of property rights and a relatively sound rule of law. That's all it takes, and individuals will do the rest.
It's always darkest before dawn. Things look pretty dark out there now. Believe it or not, that can be a great time to invest. By the time things look better, you will have missed the upswing.
I'm not saying investing at a time like this is easy, but it is smart. In the long run, investments made today will do very well, even if it's looking ugly out there right now.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, September 26, 2008
With trouble comes opportunity
Things look pretty grim out there right now.
Credit markets are freezing up. Unemployment is climbing. Housing sales, both existing and new, are hitting new lows. Orders for durable goods are down signficantly.
Our government has helped bail out 3 of the 5 largest investment banks. Fannie Mae and Freddie Mac, upon which the housing market depends so much, are in our government's conservatorship. The largest insurance company in the world, AIG, has sold itself to our government's majority ownership. Washington Mutual, the largest thrift bank in our nation, was siezed last night and parts were sold off to JPMorgan.
The U.S. executive and legislative branches are struggling to put together a multi-billion dollar plan (the bill will probably come to over a trillion, in my opinion) that will allow the government to purchase and liquidate currently illiquid securities. The Securities and Exchange Commission is preventing a growing number of companies from being sold short.
Baby, it's cold outside.
So, where are the opportunities? Let me tell you!
The only thing building up faster than the credit market "snow" outside: bargains! I've never seen so many great quality companies selling at cheap prices. And, best of all, the strongest companies are able to grow while weak companies are wallowing in too much debt.
It's always hard to buy when things look bleak, because they almost always seem to get bleaker. But, that shouldn't prevent a long term investor from taking advantage of the great opportunities available right now.
It's hard to remember how things looked in the fall of 2002 and spring of 2003. It's hard to remember how bad the market and economy looked in the fall of 1990 and spring of 1991. It's hard to remember the brutal recession of 1982 that followed a recession in late 1979 and early 1980. Same for 1974 and 1970, and on back in history.
The best time to invest is when things look terrible! That doesn't mean we are at a bottom in the stock market--no one can predict that with any degree of accuracy. But buying when things look terrible has been a pretty good method to use over time, and now looks pretty dreadful.
With touble comes opportunity. This is an outstanding time to invest, and I will be glad to point back to this point in time several years from now and say, "wasn't that a GREAT time to invest!"
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Things look pretty grim out there right now.
Credit markets are freezing up. Unemployment is climbing. Housing sales, both existing and new, are hitting new lows. Orders for durable goods are down signficantly.
Our government has helped bail out 3 of the 5 largest investment banks. Fannie Mae and Freddie Mac, upon which the housing market depends so much, are in our government's conservatorship. The largest insurance company in the world, AIG, has sold itself to our government's majority ownership. Washington Mutual, the largest thrift bank in our nation, was siezed last night and parts were sold off to JPMorgan.
The U.S. executive and legislative branches are struggling to put together a multi-billion dollar plan (the bill will probably come to over a trillion, in my opinion) that will allow the government to purchase and liquidate currently illiquid securities. The Securities and Exchange Commission is preventing a growing number of companies from being sold short.
Baby, it's cold outside.
So, where are the opportunities? Let me tell you!
The only thing building up faster than the credit market "snow" outside: bargains! I've never seen so many great quality companies selling at cheap prices. And, best of all, the strongest companies are able to grow while weak companies are wallowing in too much debt.
It's always hard to buy when things look bleak, because they almost always seem to get bleaker. But, that shouldn't prevent a long term investor from taking advantage of the great opportunities available right now.
It's hard to remember how things looked in the fall of 2002 and spring of 2003. It's hard to remember how bad the market and economy looked in the fall of 1990 and spring of 1991. It's hard to remember the brutal recession of 1982 that followed a recession in late 1979 and early 1980. Same for 1974 and 1970, and on back in history.
The best time to invest is when things look terrible! That doesn't mean we are at a bottom in the stock market--no one can predict that with any degree of accuracy. But buying when things look terrible has been a pretty good method to use over time, and now looks pretty dreadful.
With touble comes opportunity. This is an outstanding time to invest, and I will be glad to point back to this point in time several years from now and say, "wasn't that a GREAT time to invest!"
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, September 19, 2008
Dumbfounded
It first started to occur to me around 5 years ago that the housing market would probably crash and that it would almost certainly drag credit markets down with it along with home builders, mortgage insurers, bond insurers and several financial institutions.
But, if you had asked me 5 years ago what the Dow Jones Industrial Average (DJIA) would trade at given that:
1) 3 of the top 5 investment banks in the US would no longer be independent and the final 2 would be tottering
2) the US government would take over Fannie Mae and Freddie Mac because they were insolvent
3) the US government would own 80% of AIG's equity because it was also insolvent
I would have said the DJIA would be at $5,000, not $11,388.
What color is the sky in most investors' world? Does anyone really believe all these bailouts will be cost free?
I'm dumbfounded.
Don't get me wrong, my investors and I are doing very well both absolutely and relatively to the market.
But, isn't the US economy entering what could be the worst recession since the early 1980's? Isn't government intervention on a scale not seen since the Great Depression an indication of how bad things are? Isn't the world economy entering the first widespread slowdown in a generation?
Then, why is the market down so little?
I have no idea. In fact, I'm dumbfounded.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
It first started to occur to me around 5 years ago that the housing market would probably crash and that it would almost certainly drag credit markets down with it along with home builders, mortgage insurers, bond insurers and several financial institutions.
But, if you had asked me 5 years ago what the Dow Jones Industrial Average (DJIA) would trade at given that:
1) 3 of the top 5 investment banks in the US would no longer be independent and the final 2 would be tottering
2) the US government would take over Fannie Mae and Freddie Mac because they were insolvent
3) the US government would own 80% of AIG's equity because it was also insolvent
I would have said the DJIA would be at $5,000, not $11,388.
What color is the sky in most investors' world? Does anyone really believe all these bailouts will be cost free?
I'm dumbfounded.
Don't get me wrong, my investors and I are doing very well both absolutely and relatively to the market.
But, isn't the US economy entering what could be the worst recession since the early 1980's? Isn't government intervention on a scale not seen since the Great Depression an indication of how bad things are? Isn't the world economy entering the first widespread slowdown in a generation?
Then, why is the market down so little?
I have no idea. In fact, I'm dumbfounded.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, September 12, 2008
The (temporary) triumph of momentum over value
As I've mentioned before, momentum investments have been out-performing value investments over the last couple of years.
If you had just picked what had gone up in the past, it continued to go up.
Value investing, instead, focuses on understanding the value of a business and trying to buy below that value, thus providing a margin of safety (like building a bridge to handle more than you think it will bear over time).
Value has been, over the long run, one of the (if not the) smartest ways to invest.
Just because it hasn't done well lately doesn't mean it won't do well in the future. In fact, quite the opposite is true--value investing is VERY likely to out-perform momentum investing in the near future.
As additional support for this contention, take a look at a recent Motley Fool article by Andrew Sullivan, CFA. In it, he gives you a flavor of the returns that are possible for value after it has under-performed.
Trying to time when momentum will out-perform value and vice versa is a fools errand, but, at times like this, it's very easy to be patient and wait for value to begin out-performing again.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
As I've mentioned before, momentum investments have been out-performing value investments over the last couple of years.
If you had just picked what had gone up in the past, it continued to go up.
Value investing, instead, focuses on understanding the value of a business and trying to buy below that value, thus providing a margin of safety (like building a bridge to handle more than you think it will bear over time).
Value has been, over the long run, one of the (if not the) smartest ways to invest.
Just because it hasn't done well lately doesn't mean it won't do well in the future. In fact, quite the opposite is true--value investing is VERY likely to out-perform momentum investing in the near future.
As additional support for this contention, take a look at a recent Motley Fool article by Andrew Sullivan, CFA. In it, he gives you a flavor of the returns that are possible for value after it has under-performed.
Trying to time when momentum will out-perform value and vice versa is a fools errand, but, at times like this, it's very easy to be patient and wait for value to begin out-performing again.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, September 05, 2008
The Wall Street Journal gives short sellers a hand
In October 2007, I took the Wall Street Journal to task for a weak article hammering Wal-Mart. Their timing turned out to be impeccable, as I wrote about in July of this year. Wal-Mart's stock has handily beat the market since the October 2007 article.
Last week, I think the Journal may have done it again, this time with Sears (full disclosure: my clients and I own shares of Sears Holdings).
The Wall Street Journal's article, titled "Mr. Lampert, Fire Thyself," again seems thin on facts and long on generalized evaluations.
The gist of the article is that Eddie Lampert, Chairman and majority owner of Sears Holdings, should fire himself because his strategy with Sears has failed.
To support this claim, the article says another dismal quarter at Sears proves its strategy is failing. The article states that rivals are eating its lunch, too. Missing from the article is any support for these contentions. Which rivals? What made Sears' quarter so dismal? How has Sears done versus rivals both in terms of stock performance and fundamental economics? None of this information is provided.
The article goes on to mischaracterize Lampert's strategy with Sears. It claims that Eddie simply decided not to invest in Sears in hopes that would jack up return on investment. If you read any of what Lampert has to say, you'll see that he would love to invest more in Sears as long as it provides an adequate return on investment. That's what companies are supposed to do. The author either deliberately or ignorantly misses this distinction.
The article highlights same store sales are down 6% at Sears, but no mention is made of how Kohls, JC Penney, Nordstrom, Target, or any other competitors are doing. The author seems to believe these facts are not important, only the negative evaluation of Sears.
The article does point out that Sears has had a revolving door of executive managers. That's fair. And, the author points out that Lampert will have a hard time using financial engineering with crunched credit markets and a difficult real estate market. That's true, too.
But, a couple of facts and a lot of evaluative statements not supported by facts isn't good reporting. Sears is generating a ton of cash, and its balance sheet is more solid than many rivals. This can be seen in share buybacks if nothing else. Why isn't that mentioned, I wonder?
Sears isn't investing much in stores, but perhaps that's a smarter strategy than throwing good money after bad. Why isn't that highlighted? And why didn't the author differentiate between not investing in stores as a strategy versus not investing in inadequate return on capital projects?
I have a guess. I think short sellers are eager to see Lampert and Sears fail. At the same time, Wall Street Journal journalists are hungry for a sensational story. Combine these two ingredients and mix liberally with lack of scruples, and you get a Wall Street Journal article thin on substance and high on sensation.
Perhaps the Journal has called the bottom on Sears like they did on Wal-Mart. I'll be eagerly watching to see what happens.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
In October 2007, I took the Wall Street Journal to task for a weak article hammering Wal-Mart. Their timing turned out to be impeccable, as I wrote about in July of this year. Wal-Mart's stock has handily beat the market since the October 2007 article.
Last week, I think the Journal may have done it again, this time with Sears (full disclosure: my clients and I own shares of Sears Holdings).
The Wall Street Journal's article, titled "Mr. Lampert, Fire Thyself," again seems thin on facts and long on generalized evaluations.
The gist of the article is that Eddie Lampert, Chairman and majority owner of Sears Holdings, should fire himself because his strategy with Sears has failed.
To support this claim, the article says another dismal quarter at Sears proves its strategy is failing. The article states that rivals are eating its lunch, too. Missing from the article is any support for these contentions. Which rivals? What made Sears' quarter so dismal? How has Sears done versus rivals both in terms of stock performance and fundamental economics? None of this information is provided.
The article goes on to mischaracterize Lampert's strategy with Sears. It claims that Eddie simply decided not to invest in Sears in hopes that would jack up return on investment. If you read any of what Lampert has to say, you'll see that he would love to invest more in Sears as long as it provides an adequate return on investment. That's what companies are supposed to do. The author either deliberately or ignorantly misses this distinction.
The article highlights same store sales are down 6% at Sears, but no mention is made of how Kohls, JC Penney, Nordstrom, Target, or any other competitors are doing. The author seems to believe these facts are not important, only the negative evaluation of Sears.
The article does point out that Sears has had a revolving door of executive managers. That's fair. And, the author points out that Lampert will have a hard time using financial engineering with crunched credit markets and a difficult real estate market. That's true, too.
But, a couple of facts and a lot of evaluative statements not supported by facts isn't good reporting. Sears is generating a ton of cash, and its balance sheet is more solid than many rivals. This can be seen in share buybacks if nothing else. Why isn't that mentioned, I wonder?
Sears isn't investing much in stores, but perhaps that's a smarter strategy than throwing good money after bad. Why isn't that highlighted? And why didn't the author differentiate between not investing in stores as a strategy versus not investing in inadequate return on capital projects?
I have a guess. I think short sellers are eager to see Lampert and Sears fail. At the same time, Wall Street Journal journalists are hungry for a sensational story. Combine these two ingredients and mix liberally with lack of scruples, and you get a Wall Street Journal article thin on substance and high on sensation.
Perhaps the Journal has called the bottom on Sears like they did on Wal-Mart. I'll be eagerly watching to see what happens.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, August 22, 2008
Credit markets still crashing
Although I'd love to see the US economy recovering, I believe that the credit meltdown is still on-going.
After listening to several conference calls, including American Express, Target, CarMax and Lab Corp, it sounds like the US consumer is still struggling in a major way.
Another sign of credit market malaise can be seen in yield spreads. The spread between low and high quality credits keeps getting wider, and this is a sign of continued credit market weakness.
How big of an impact do credit markets have on the US economy and US businesses? Very big.
It's easy to see why businesses must borrow frequently--they must produce before they can sell, and many businesses borrow to do that. But, many don't seem to grasp to what degree US consumers have been living beyond their means for the last decade.
US consumer debt is at record highs when compared to income and assets. Consumers are having a harder time paying their bills and their debt levels aren't helping.
US consumers borrowed against their homes to buy stuff over the last decade.
American Express highlighted this in their recent conference call. Their customers in markets with declining housing prices are spending much less than they were a year ago--across all income levels!
Target is also experiencing difficulties with their credit racked customers. CarMax is struggling to sell cars because customers can't get loans. Why? Because the credit markets aren't buying car loans.
Even Lab Corp, a company that specializes in running tests for hospitals and physicians, is feeling the credit pinch. On their conference call, analysts hammered company management about their receivables and why customers weren't paying. The answer--US consumers are strapped.
Credit markets will not recover until banks rebuild their balance sheets. Banks won't rebuild their balance sheets until the US consumer recovers. And, the US consumer will not recover until housing bottoms.
I don't know when that will happen, but I know it hasn't happened, yet.
Stock markets may do well as election year uncertainty clears up this fall. But, when that is past, investors will refocus on corporate earnings, credit markets, the financial services industry, and the housing market. Until those things improve, I wouldn't expect too much from stock markets.
(Full disclosure: I don't own any shares of American Express, CarMax, Target or Lab Corp).
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Although I'd love to see the US economy recovering, I believe that the credit meltdown is still on-going.
After listening to several conference calls, including American Express, Target, CarMax and Lab Corp, it sounds like the US consumer is still struggling in a major way.
Another sign of credit market malaise can be seen in yield spreads. The spread between low and high quality credits keeps getting wider, and this is a sign of continued credit market weakness.
How big of an impact do credit markets have on the US economy and US businesses? Very big.
It's easy to see why businesses must borrow frequently--they must produce before they can sell, and many businesses borrow to do that. But, many don't seem to grasp to what degree US consumers have been living beyond their means for the last decade.
US consumer debt is at record highs when compared to income and assets. Consumers are having a harder time paying their bills and their debt levels aren't helping.
US consumers borrowed against their homes to buy stuff over the last decade.
American Express highlighted this in their recent conference call. Their customers in markets with declining housing prices are spending much less than they were a year ago--across all income levels!
Target is also experiencing difficulties with their credit racked customers. CarMax is struggling to sell cars because customers can't get loans. Why? Because the credit markets aren't buying car loans.
Even Lab Corp, a company that specializes in running tests for hospitals and physicians, is feeling the credit pinch. On their conference call, analysts hammered company management about their receivables and why customers weren't paying. The answer--US consumers are strapped.
Credit markets will not recover until banks rebuild their balance sheets. Banks won't rebuild their balance sheets until the US consumer recovers. And, the US consumer will not recover until housing bottoms.
I don't know when that will happen, but I know it hasn't happened, yet.
Stock markets may do well as election year uncertainty clears up this fall. But, when that is past, investors will refocus on corporate earnings, credit markets, the financial services industry, and the housing market. Until those things improve, I wouldn't expect too much from stock markets.
(Full disclosure: I don't own any shares of American Express, CarMax, Target or Lab Corp).
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, August 15, 2008
Value investor drought
Pity the poor value investors.
Although they have excellent long term records, value investor results over the past couple of years have been poor relative to the market.
Consider Bill Miller at Legg Mason. After beating the S&P 500 for 15 years in a row, he has had a dreadful 2 1/2 years. His performance has been so bad his mutual fund investors are leaving in droves.
Does this mean value investing no longer works? Should investors pursue another methodology? If value investing hasn't worked, what has?
The answer is momentum. If you simply invested in the things that were going up, you would have easily beaten the market. Invest in natural resources, such as oil or gold, after they went up and they'd just keep going up.
Is that a good way to invest now? Not normally, and probably not going forward.
You see, the market goes through periods when one thing works and others don't. This rarely lasts because everyone jumps on the bandwagon until it's full and no one else is left to jump on board. I think we're close to that point now.
The last time momentum out-performed value investing was in the 1998-1999 period. After that, value investing clearly beat momentum investing for several years running.
Usually, when the market goes down, value investing handily out-performs. But in this down market, momentum has been winning. You have to go all the way back to the early 1990's to find a similar situation. Guess what happened after that? That's when Bill Miller's record 15 years of out-performing the S&P 500 began.
Don't pity the poor value investors--JOIN THEM. Every time value investing has performed poorly in the past has proven to be an excellent time to get on the value investing bandwagon. Right now, people are getting off, and that's precisely why you should be getting on!
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Pity the poor value investors.
Although they have excellent long term records, value investor results over the past couple of years have been poor relative to the market.
Consider Bill Miller at Legg Mason. After beating the S&P 500 for 15 years in a row, he has had a dreadful 2 1/2 years. His performance has been so bad his mutual fund investors are leaving in droves.
Does this mean value investing no longer works? Should investors pursue another methodology? If value investing hasn't worked, what has?
The answer is momentum. If you simply invested in the things that were going up, you would have easily beaten the market. Invest in natural resources, such as oil or gold, after they went up and they'd just keep going up.
Is that a good way to invest now? Not normally, and probably not going forward.
You see, the market goes through periods when one thing works and others don't. This rarely lasts because everyone jumps on the bandwagon until it's full and no one else is left to jump on board. I think we're close to that point now.
The last time momentum out-performed value investing was in the 1998-1999 period. After that, value investing clearly beat momentum investing for several years running.
Usually, when the market goes down, value investing handily out-performs. But in this down market, momentum has been winning. You have to go all the way back to the early 1990's to find a similar situation. Guess what happened after that? That's when Bill Miller's record 15 years of out-performing the S&P 500 began.
Don't pity the poor value investors--JOIN THEM. Every time value investing has performed poorly in the past has proven to be an excellent time to get on the value investing bandwagon. Right now, people are getting off, and that's precisely why you should be getting on!
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, August 08, 2008
Short versus long term
In a stock market like we're in today, it's not easy to focus on the long term.
Volatility is high as bad news and good news seems to be announced every day.
What's an investor to do? Think long term.
The best investments are made when the market is getting beat up. The best investments are not those that will perform well today, this week, this month, or this year. The best investments are companies that can fund growth during bad times.
You see, many companies operate on a razor's edge. They don't prepare for down times. They try to maximize short term profits by taking risks either operationally (jumping into the latest craze) or financially (loading up with debt).
The best companies and the best investments operate conservatively, so when bad times come, they can grow their businesses precisely when other companies are over a barrel.
But, conservative companies don't do as well in good times, so most people ignore them. And, when bad times come, their stock prices get beat up even further because they are spending like crazy to foster future growth and thus reporting lower earnings in the present and near future.
The stock market focuses on the short term, and doesn't like to hear that a company is expanding during tough times. But, that's what great companies do, and that's what makes them great investments over the long haul.
I'm finding a tremendous number of great companies that are expanding into the downturn, planting seeds that will lead to outstanding and profitable growth when things start to improve. Interestingly, their stock prices are taking a beating because they are spending heavily during tough times. But, if you lift your head up to a 5 year investing horizon, you can see just how great an investment they will be.
I'm not saying it's easy to invest in a company whose stock price is going down. It isn't.
I am saying that such an investment can look very smart if you're not investing for the short term. That's what I'm doing both with my own dollars and my clients' dollars, and I'm very excited about the results I believe we'll get over the next 5 years.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
In a stock market like we're in today, it's not easy to focus on the long term.
Volatility is high as bad news and good news seems to be announced every day.
What's an investor to do? Think long term.
The best investments are made when the market is getting beat up. The best investments are not those that will perform well today, this week, this month, or this year. The best investments are companies that can fund growth during bad times.
You see, many companies operate on a razor's edge. They don't prepare for down times. They try to maximize short term profits by taking risks either operationally (jumping into the latest craze) or financially (loading up with debt).
The best companies and the best investments operate conservatively, so when bad times come, they can grow their businesses precisely when other companies are over a barrel.
But, conservative companies don't do as well in good times, so most people ignore them. And, when bad times come, their stock prices get beat up even further because they are spending like crazy to foster future growth and thus reporting lower earnings in the present and near future.
The stock market focuses on the short term, and doesn't like to hear that a company is expanding during tough times. But, that's what great companies do, and that's what makes them great investments over the long haul.
I'm finding a tremendous number of great companies that are expanding into the downturn, planting seeds that will lead to outstanding and profitable growth when things start to improve. Interestingly, their stock prices are taking a beating because they are spending heavily during tough times. But, if you lift your head up to a 5 year investing horizon, you can see just how great an investment they will be.
I'm not saying it's easy to invest in a company whose stock price is going down. It isn't.
I am saying that such an investment can look very smart if you're not investing for the short term. That's what I'm doing both with my own dollars and my clients' dollars, and I'm very excited about the results I believe we'll get over the next 5 years.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, August 01, 2008
Being a value investor requires painful patience
I'll spare you the academic citations, but there's a solid body of evidence that value investing beats growth investing over the long run.
If it works so well, why isn't everyone a value investor?
Because it hurts.
Value investing is based on a couple of key principles:
1) you can determine the value of a business
2) the price of a business on a stock exchange diverges from value
3) at some point in time, stock price converges on value
The hard part in value investing is point 3).
No one is surprised that you can determine the value of a business.
Not many are surprised (finance and economics academics excluded) that stock prices diverge from value.
The hard part is that first phrase in point 3), "at some point in time." How long do you have to wait for "at some point in time"? As Shakespeare put it, there's the rub.
No value investor knows when the herd mentality of the stock market will converge on underlying value. Why not? You might as well as ask why a weather expert can't predict how many inches of rain will fall on one square inch of land in Bowie, Maryland during a 12 hour period on June 30, 2014. The system is simply too complex for an accurate prediction to be made.
And, as any value investor can tell you (ask Bill Miller), it seldom works the way you think it will.
If the company you've bought consistently reports growing earnings per share, surely then the market will converge. No, it doesn't.
Sometimes price converges on value without any news whatsoever. Sometimes price converges when a company announced declining earnings for quarters on end. Most of the time, while you wait, it doesn't converge at all.
You simply can't know when it will happen.
I've seen it happen in one day, and I've seen it take over 7 years.
And, that's why it works. Most people don't have the patience to wait. They want prices to go up soon...today...RIGHT NOW!!!
Value investing works because few people have the intestinal fortitude to wait.
It's like asking an overweight person about losing weight or a poor person how to become wealthy. They both know the answer. The overweight person will tell you it requires a good diet and exercise, but they won't do it. The poor person will explain that you need to spend less than you make to become wealthy, and yet they won't do it.
The reason it works is not because people don't understand what to do, but because it hurts to do it.
That's why I say that value investors get paid to endure pain. It's painful to wait if you don't know when price will reflect value. It's painful to buy something cheap just to watch it become dramatically cheaper. It's painful to watch fundamental performance deteriorate even though you know it will improve several years from now.
Anyone who has done their homework knows what it takes to beat the market. Value businesses, buy when price is significantly below value, sell when price reflects value. Everyone knows it, but hardly anyone does it.
Why? Because it's painful. But, boy, does it work!
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
I'll spare you the academic citations, but there's a solid body of evidence that value investing beats growth investing over the long run.
If it works so well, why isn't everyone a value investor?
Because it hurts.
Value investing is based on a couple of key principles:
1) you can determine the value of a business
2) the price of a business on a stock exchange diverges from value
3) at some point in time, stock price converges on value
The hard part in value investing is point 3).
No one is surprised that you can determine the value of a business.
Not many are surprised (finance and economics academics excluded) that stock prices diverge from value.
The hard part is that first phrase in point 3), "at some point in time." How long do you have to wait for "at some point in time"? As Shakespeare put it, there's the rub.
No value investor knows when the herd mentality of the stock market will converge on underlying value. Why not? You might as well as ask why a weather expert can't predict how many inches of rain will fall on one square inch of land in Bowie, Maryland during a 12 hour period on June 30, 2014. The system is simply too complex for an accurate prediction to be made.
And, as any value investor can tell you (ask Bill Miller), it seldom works the way you think it will.
If the company you've bought consistently reports growing earnings per share, surely then the market will converge. No, it doesn't.
Sometimes price converges on value without any news whatsoever. Sometimes price converges when a company announced declining earnings for quarters on end. Most of the time, while you wait, it doesn't converge at all.
You simply can't know when it will happen.
I've seen it happen in one day, and I've seen it take over 7 years.
And, that's why it works. Most people don't have the patience to wait. They want prices to go up soon...today...RIGHT NOW!!!
Value investing works because few people have the intestinal fortitude to wait.
It's like asking an overweight person about losing weight or a poor person how to become wealthy. They both know the answer. The overweight person will tell you it requires a good diet and exercise, but they won't do it. The poor person will explain that you need to spend less than you make to become wealthy, and yet they won't do it.
The reason it works is not because people don't understand what to do, but because it hurts to do it.
That's why I say that value investors get paid to endure pain. It's painful to wait if you don't know when price will reflect value. It's painful to buy something cheap just to watch it become dramatically cheaper. It's painful to watch fundamental performance deteriorate even though you know it will improve several years from now.
Anyone who has done their homework knows what it takes to beat the market. Value businesses, buy when price is significantly below value, sell when price reflects value. Everyone knows it, but hardly anyone does it.
Why? Because it's painful. But, boy, does it work!
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, July 25, 2008
What's beating the market down?
A lot of things are coming together to cause the market to go down, recently.
One issue is lower earnings forecasts for the 3rd and 4th quarter. Companies reporting 2nd quarter earnings are saying things don't look that great for the rest of the year. This is knocking down stock prices. As investors optimistically begin to look forward to 2009 this fall, I expect the stock market to rally.
Another issue is uncertainty over upcoming elections. Markets hate uncertainty, and until it becomes clear who will win upcoming elections (both Presidential and Congressional) and what those elected will do, the market will do poorly. As that uncertainty clears up this fall, I expect the stock market to recover.
A third issue is the housing market. Housing inventories are very high, home sales volumes are low, and home prices continue to decline. Not only is housing an important part of our economy, it's also a major part of most consumers' wealth. Depressed consumers spend less, and that is reducing stock prices. When the housing market shows concrete signs of recovering, and I have no idea when that will happen (although I'm guessing late this year or early next), I expect the stock market to resume its climb.
A fourth issue, strongly related to the third, is the financial services sector. Banks are seeing their loans to consumers and businesses sour. At the same time, consumers and businesses need the money they put with banks as deposits to cover their needs as the economy slows. This perfect storm is hurting banks in a major way. After the housing market, and thus consumers and businesses, begin to recover, so will the banks.
A fifth issue is energy prices. Although energy prices have pulled back, no one is certain whether they will continue down or climb again. My guess is that high energy prices have both brought more supply online and reduced demand, so I expect energy prices to continue to decline in the short run. If such a decline becomes more clear, I think the market will rebound.
The way I see it, there are both short and long term issues at hand.
One short term issue is the market's transition from looking at 3rd and 4th quarter earnings to looking forward to 2009 earnings. Another short term issue is election season. Those two issues are relatively easy to predict and should tend to lift market prices some time this fall.
Two long term issues are the housing market and financial services sectors. I don't know when these two will recover, but when they do it will be a major and longer term lift to market prices.
Energy is both a short and long term issue. In the short run, I believe energy prices will come down and tend to support the economy and market prices, especially this fall. In the long run, I don't believe it will be easy to find supply to keep up with growing demand, and higher energy prices will tend to undercut the economy and market prices. This dynamic is very difficult to predict.
I expect market prices to continue to decline into early fall, as investors focus on current economic conditions and election uncertainty. Such a decline will be tempered by declining energy prices and accelerated by rising energy prices.
In the longer run, the market will not begin a long term climb until the conditions in the housing market and financial sector improve. I can't predict when this will happen, but it may happen this fall or some time next year.
In the much longer term, as the economy recovers and demand picks up, so will energy prices. This will dampen the market's rally to some degree.
Although I don't use market predictions to time the market, I believe an understanding of market dynamics are useful for investors who are trying to understand what is happening and when it will improve.
The best time to buy is when things look terrible, and the best time to sell is when things look great. Whether the market rallies this fall, next year, or 3 years from now, I believe this is a great time to invest.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
A lot of things are coming together to cause the market to go down, recently.
One issue is lower earnings forecasts for the 3rd and 4th quarter. Companies reporting 2nd quarter earnings are saying things don't look that great for the rest of the year. This is knocking down stock prices. As investors optimistically begin to look forward to 2009 this fall, I expect the stock market to rally.
Another issue is uncertainty over upcoming elections. Markets hate uncertainty, and until it becomes clear who will win upcoming elections (both Presidential and Congressional) and what those elected will do, the market will do poorly. As that uncertainty clears up this fall, I expect the stock market to recover.
A third issue is the housing market. Housing inventories are very high, home sales volumes are low, and home prices continue to decline. Not only is housing an important part of our economy, it's also a major part of most consumers' wealth. Depressed consumers spend less, and that is reducing stock prices. When the housing market shows concrete signs of recovering, and I have no idea when that will happen (although I'm guessing late this year or early next), I expect the stock market to resume its climb.
A fourth issue, strongly related to the third, is the financial services sector. Banks are seeing their loans to consumers and businesses sour. At the same time, consumers and businesses need the money they put with banks as deposits to cover their needs as the economy slows. This perfect storm is hurting banks in a major way. After the housing market, and thus consumers and businesses, begin to recover, so will the banks.
A fifth issue is energy prices. Although energy prices have pulled back, no one is certain whether they will continue down or climb again. My guess is that high energy prices have both brought more supply online and reduced demand, so I expect energy prices to continue to decline in the short run. If such a decline becomes more clear, I think the market will rebound.
The way I see it, there are both short and long term issues at hand.
One short term issue is the market's transition from looking at 3rd and 4th quarter earnings to looking forward to 2009 earnings. Another short term issue is election season. Those two issues are relatively easy to predict and should tend to lift market prices some time this fall.
Two long term issues are the housing market and financial services sectors. I don't know when these two will recover, but when they do it will be a major and longer term lift to market prices.
Energy is both a short and long term issue. In the short run, I believe energy prices will come down and tend to support the economy and market prices, especially this fall. In the long run, I don't believe it will be easy to find supply to keep up with growing demand, and higher energy prices will tend to undercut the economy and market prices. This dynamic is very difficult to predict.
I expect market prices to continue to decline into early fall, as investors focus on current economic conditions and election uncertainty. Such a decline will be tempered by declining energy prices and accelerated by rising energy prices.
In the longer run, the market will not begin a long term climb until the conditions in the housing market and financial sector improve. I can't predict when this will happen, but it may happen this fall or some time next year.
In the much longer term, as the economy recovers and demand picks up, so will energy prices. This will dampen the market's rally to some degree.
Although I don't use market predictions to time the market, I believe an understanding of market dynamics are useful for investors who are trying to understand what is happening and when it will improve.
The best time to buy is when things look terrible, and the best time to sell is when things look great. Whether the market rallies this fall, next year, or 3 years from now, I believe this is a great time to invest.
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, July 18, 2008
Is the banking crisis over?
For those of you who want to see my latest quarterly client letter, it's here.
Banks stocks took a beating over the last several weeks, and it created some wonderful opportunities to buy top-notch banks at rock bottom prices.
Not only was I a buyer, but an eager buyer of certain companies. But, not all banks are equally good, and just because I'm buying specific companies at specific prices is not a statement that banks stocks have hit bottom.
I don't try to pick bottoms because I don't know that anyone can. It's like forecasting the weather, you can get in the ballpark with some guesses, but you never really know exactly what's going to happen.
If you don't believe me, look at the annual hurricane forecasts over the last several years. They are pretty far off on an annual basis, but pretty accurate over 5 year time frames. Sounds like the stock market in many ways....
Back to bank stocks. I don't know if crowd psychology has signaled capitulation in bank stocks in general. I don't believe so. I think poorly run banks will be announcing significantly worse results as the impacts of a slower economy ripple up into more loan defaults and delinquencies.
I'm buying now because good banks hit very good prices, not because I know when bank stocks will bottom. In fact, I may very well have opportunities to buy the companies I just bought at even lower prices.
As the stock market continues to recognize that the 3rd and 4th quarter won't be so peachy, I'd expect it to roll over further. It also wouldn't surprise me that what we're currently seeing is short covering and mere reactions to short term noise.
When will the market and banks stocks really bottom? I don't know, but my guess is that people will be talking less about buying bargains at that point, and more about running for the hills.
As Rothschild said, "Buy when there's blood in the streets."
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
For those of you who want to see my latest quarterly client letter, it's here.
Banks stocks took a beating over the last several weeks, and it created some wonderful opportunities to buy top-notch banks at rock bottom prices.
Not only was I a buyer, but an eager buyer of certain companies. But, not all banks are equally good, and just because I'm buying specific companies at specific prices is not a statement that banks stocks have hit bottom.
I don't try to pick bottoms because I don't know that anyone can. It's like forecasting the weather, you can get in the ballpark with some guesses, but you never really know exactly what's going to happen.
If you don't believe me, look at the annual hurricane forecasts over the last several years. They are pretty far off on an annual basis, but pretty accurate over 5 year time frames. Sounds like the stock market in many ways....
Back to bank stocks. I don't know if crowd psychology has signaled capitulation in bank stocks in general. I don't believe so. I think poorly run banks will be announcing significantly worse results as the impacts of a slower economy ripple up into more loan defaults and delinquencies.
I'm buying now because good banks hit very good prices, not because I know when bank stocks will bottom. In fact, I may very well have opportunities to buy the companies I just bought at even lower prices.
As the stock market continues to recognize that the 3rd and 4th quarter won't be so peachy, I'd expect it to roll over further. It also wouldn't surprise me that what we're currently seeing is short covering and mere reactions to short term noise.
When will the market and banks stocks really bottom? I don't know, but my guess is that people will be talking less about buying bargains at that point, and more about running for the hills.
As Rothschild said, "Buy when there's blood in the streets."
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Friday, July 11, 2008
Wal-Mart is dead, long live Wal-Mart
Full disclosure: my clients and I own shares of Wal-Mart.
Back on October 3rd, 2007, I posted a blog criticizing a Wall Street Journal article that claimed "Wal-Mart Era Wanes Amid Big Shifts in Retail; Rivals Find Strategies to Defeat Low Prices; World Has Changed."
More specifically, I claimed the author of the article had picked the bottom for Wal-Mart's stock.
On October 3rd, the stock closed at $45.13 per share. The most recent low for Wal-Mart had been $42.27 posted on September 10th, 2007.
Today, the shares trade at around $56 and have been as high at $59.80. At $56 a share, that's a 24% gain in value, not including dividends.
On October 3rd, 2007, the S&P 500 closed at $1,539.59. Today, the S&P 500 is around $1,235. That's a 19.8% loss (once again, without dividends).
In other words, the performance difference between Wal-Mart and the S&P 500 from October 3rd, 2007 until now was a whopping 43.8%!!!
Now, why am I bringing this up? Just to toot my own horn and brag how smart or lucky I got? No (okay, maybe a little).
My reason for bringing this up is the same reason I made the post on 10/3/2007, to highlight how far astray you can be lead by following the popular press for investment advice.
By the time the Wall Street Journal, or any other popular periodical, comes out with news about a company, it's almost always figured into the price and then some.
In fact, the time to buy a company is when the popular press is saying it's dead. The time to sell is when they are singing its praises.
As I said on 10/3/2007, "I'll bet that in a few years I'll be writing a blog saying that I've sold Wal-Mart because the popular press is reporting that Wal-Mart is back at the top of its game again."
Perhaps that time will come sooner than I think...
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
Full disclosure: my clients and I own shares of Wal-Mart.
Back on October 3rd, 2007, I posted a blog criticizing a Wall Street Journal article that claimed "Wal-Mart Era Wanes Amid Big Shifts in Retail; Rivals Find Strategies to Defeat Low Prices; World Has Changed."
More specifically, I claimed the author of the article had picked the bottom for Wal-Mart's stock.
On October 3rd, the stock closed at $45.13 per share. The most recent low for Wal-Mart had been $42.27 posted on September 10th, 2007.
Today, the shares trade at around $56 and have been as high at $59.80. At $56 a share, that's a 24% gain in value, not including dividends.
On October 3rd, 2007, the S&P 500 closed at $1,539.59. Today, the S&P 500 is around $1,235. That's a 19.8% loss (once again, without dividends).
In other words, the performance difference between Wal-Mart and the S&P 500 from October 3rd, 2007 until now was a whopping 43.8%!!!
Now, why am I bringing this up? Just to toot my own horn and brag how smart or lucky I got? No (okay, maybe a little).
My reason for bringing this up is the same reason I made the post on 10/3/2007, to highlight how far astray you can be lead by following the popular press for investment advice.
By the time the Wall Street Journal, or any other popular periodical, comes out with news about a company, it's almost always figured into the price and then some.
In fact, the time to buy a company is when the popular press is saying it's dead. The time to sell is when they are singing its praises.
As I said on 10/3/2007, "I'll bet that in a few years I'll be writing a blog saying that I've sold Wal-Mart because the popular press is reporting that Wal-Mart is back at the top of its game again."
Perhaps that time will come sooner than I think...
Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.
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