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.
Friday, August 22, 2008
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.
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