Abundant Opportunities in Bear Markets 8 comments
Lance Helfert
About this author:
-
Font Size:
-
Print
- TweetThis
Some Days You Eat The Bear…
…and some days the bear eats you. This saying represents an old western philosophy that fate is fickle, life has its ups and downs – you win some and you lose some. Ultimately, how you manage life’s travails determines whether you win in the long run, and the long run is what matters. A bear market is not the end of the world. There’s no question that bear bites are painful, but pain endured is new strength found. Wounds heal, but how do you treat bear market injuries? Often, the best course is to patiently let them heal themselves.
Writing a monthly column about something as volatile as the stock market may seem like a disadvantage. For example, last month we referred to September 15, 2008 as the market’s worst day since 9/11/2001, but by the time we published the column, the market had set new record declines. The point of that article, that panicked investors turn temporary losses into permanent losses by selling low, holds true regardless of the daily headlines.
Over the last sixty days, every news outlet in the world has been leading with financial news. Thousands of articles, blog entries, talk shows and newscasts provide hour-by-hour and sometimes minute-by-minute updates on the market. In our opinion, this is part of the problem. The press has yelled “fire” in a crowded theater. Granted, the financial crisis is real, but even when there is a fire in a crowded theater, panic only multiplies the injuries. It’s better to execute practiced and well thought out emergency procedures.
Bear markets are not uncommon. Prolonged bear markets ran from 1929 through 1942, and from 1968 to 1982. By some definitions, we have been in a bear market since the technology bubble burst and dragged the S&P 500 down almost 50% between March of 2000 and October of 2002. Yes, the market has climbed quite high over the past couple of years, but rallies within bear markets are not uncommon either. One should keep in mind that so-called bear and bull markets are just aggregate opinions on the future of the economy. Investor over-reaction ensures that these opinions are almost always wrong, or at least badly exaggerated.
It’s All Connected
Many people seem bewildered that the government’s announced interventions have not instantly solved the financial crisis and driven the stock market back to pre-crisis levels. This merely emphasizes that the economy is complex, the stock market is imperfect and often inefficient, and human beings are absurdly impatient. The same expectation of instant gratification that fueled our credit binge now plagues the markets. We want answers NOW, just as we wanted bigger homes, bigger flat screen TVs, and bigger SUVs, NOW! Digital cameras give us instant photos, TIVO lets us time-shift our favorite programs and skip commercials, and of course, the Internet lets us find information and do our shopping anywhere, anytime. Ironically, our impatience with others for not fixing the economy distracts us from doing our part to fix the economy by staying calm and behaving rationally.
Pundits and politicians have desperately tried to fix blame on one or another element, and this of course is why our quick fixes to date have accomplished little. Even an oversimplified look at the economy shows the tenuousness of the relationships: consumer spending accounts for 70% of economic activity, consumers get their spending money from their employers or from credit. Many of the consumers’ employers manage their cash flow through “commercial paper” (very short-term loans), which are funded by banks that get their money from investors looking for reliable returns. The companies pay back their loans with the cash flow supplied by consumer spending. A slipped gear anywhere in the process can stop the whole machine.
Some believe the trigger came when consumers ran out of credit. Since real wages have been going down for years, consumers maintained or increased their standard of spending by tapping equity in their homes. When house prices stopped rising, consumers had to stop or slow their spending. This reduced potential corporate profits, which reduced their credit-worthiness. Of course, the banks were already unable or unwilling to make loans, since years of easy credit policies left them undercapitalized and holding bad loans in unknown – but presumably huge – amounts. That’s a lot of slipped gears.
Thus, even companies that are doing well cannot get their commercial paper funded – this is the credit freeze you’ve read so much about. If they cannot fund their business, they must reduce their costs, possibly through layoffs. This of course reduces personal incomes and slows consumer spending. Moreover, gainfully employed people begin to fear layoffs, so they also stop spending. This reduces corporate profits, which leads to credit problems and layoffs and less consumer spending, and the cycle repeats, sometimes into recession.
The problem with our fixes so far is that the government can print money, but it cannot buy courage. “Once bitten, twice shy” lenders who got burned by issuing loans to unqualified borrowers now refuse to extend credit to responsible borrowers. Treasury secretary Paulson can recapitalize the banks, but he cannot force them to lend money. And they won’t lend money if they fear borrowers cannot repay them in the future. Consumers will not spend if they fear the future. Companies will not hire if they fear the future. It’s a cascade of self-fulfilling prophecies.
We’ve often written that no one can predict the future, but we’ll go out on a limb this far: the USA’s culture of innovation gives us great confidence in the future. That’s why value investors like Warren Buffett advise people to be fearful when others are greedy, and greedy when others are fearful. In a bear market, some very high quality companies with excellent long-term profitability will sell at prices below their intrinsic value. Some are even selling for less than the value of their cash on hand! Amid all the fear and uncertainty of the current economic crisis, opportunities will arise and clear-headed investors will exploit them.
The Human Element
By the time paper copies of this newsletter arrive in the mail, the United States will have chosen a new President-elect. No one knows how either candidate’s plans may influence the stock market, but we do know that certain industries may benefit. For example, both candidates promote alternative energy projects. Even though the price of oil has plummeted in recent months, the people’s desire for greener energy is growing, so pure economics will not be the only factor in America’s future energy policy. We can only hope this critical momentum towards alternatives won’t falter while the price of oil is down in the short term, as this will leave us behind the curve once things pick up again…
One of the ironic aspects of the current economic crisis is that just weeks ago the world was complaining about high oil prices, but now economists are concerned about how quickly oil prices are dropping. Lower oil prices should be great news for most companies because it lowers their costs. Unfortunately, oil prices are dropping because the market projects that companies will use less oil as economic activity – production and consumption – slows dramatically. Actual oil use will not decline, but growth will slow, and that drags prices down. As we said before, it’s all connected.
A film producer told us that economic downturns are typically good for the film industry and the alcoholic beverage industry. That is historically correct, but in recent years the film studios have been getting financing from hedge funds and other investment groups, so while people may indeed want to go to the movies to take their minds off the nation’s economic woes, the studios may have trouble financing their wares. But his point still resonates: the economy reflects the daily needs and desires of the people within it.
This is why companies like PepsiCo (NYSE: PEP), Cadbury (NYSE: CBY), and Johnson & Johnson (NYSE: JNJ) appear in many value investors’ portfolios. In a recession, people might not buy new stereo systems, cars and appliances, but they still buy soda, chewing gum and medicines. Along the way, new innovations spawn new industries and new prosperity. The literal definition of “crisis” is “turning point”, and no one can yet say what new direction our economy will take. Perhaps we will come out of this bear market as the world’s premium purveyor of electric automobiles. Perhaps we will export wind and biofuel energy expertise to oil-rich nations as their natural resources decline.
When Staples Go On Sale
Everyday goods providers like PepsiCo (NYSE: PEP) and Johnson & Johnson (NYSE: JNJ) do not always outperform the S&P 500, but they always seem to perform. That is to say, in good times or bad, people buy soft drinks and medicines. Long-term investors like such stocks in a portfolio, especially when they can be purchased at discount prices. Consumers will be tightening their belts in the weeks, months and possibly years to come. What products and services do you think will still be popular or necessary?
We do not know how our economy or the prices of our stocks will react next week or next month, but we do know that the U.S. economy has been tested time and again, and in every case has proven resilient. The way we look at it, there are three doors to choose from – Yesterday, Today, and Tomorrow. Stocks are clearly cheaper today than they were yesterday, and if we believe in tomorrow then today should prove an extraordinary time to own stocks. Marty Whitman, a legendary 83-year-old value investor, was recently quoted as follows – “We can’t try to pick the bottom, but it seems to me that there are great values out there now, just like in 1974.” He added, “Everything went down every day, and if you bought, you hit a lot of 10-baggers [1,000% gains].”
The success of capitalism is assured not because of its efficaciousness as an economic system, but its accuracy as a description of human nature. We aspire to build, to create. We work tirelessly to make something new in the world, share it with humanity and enjoy the fruits of our labors. This is not a result of economic theory; it is simply who we are. That is why disasters and tragedies great and small have done little to impede mankind’s progress. Watching the current panic on Wall Street, we remember that even the Great Depression did not defeat the United States and our vision of capitalism. William Faulkner, who lived through WWI, the Depression and WWII, expressed the sentiment in his Nobel Prize acceptance speech: “I believe that man will not merely endure: he will prevail.” Recognizing that the cycle of bear and bull markets is a natural phenomenon of public stock exchanges, entrepreneurial investors know that today we endure so that tomorrow we may prevail.
As Marty Whitman suggests, no one can “time the bottom,” but anyone can see when a stock is selling for less than the value of its cash on hand, or less than its intrinsic value, and can therefore find abundant opportunities in bear markets.
Disclosure: none
Related Articles
|
-
The Seeking Alpha 100
See allThe top 100 stock
market authors
selected for publication
Seeking Alpha 100 » -
Fastest Climbers
Authors with the largestSee all
increase in followers
in the last 7 days
Fastest Climbers » -
Top Commenters
Top commenters,See all
as ranked by their peers
Top Commenters » -
Top Instabloggers
The 100 most active
Instabloggers.-
1
TraderMark
-
2
Don Dion
-
3
Cliff Wachtel
-
4
Mike Havrilla
-
5
James Quinn
Top Instabloggers » -
1
-
Top StockTalkers
TopSee all
StockTalkers.
Top StockTalkers »
This article has 8 comments:
"We work tirelessly to make something new in the world, share it with humanity and enjoy the fruits of our labors. This is not a result of economic theory; it is simply who we are."
Not when our biggest airline can't produce because the of a strike. Not when neither presidential candidate really understands the economy and especially not when the perceived next president wants to increase taxes on a portion of the population that already pays over 50% of the nations taxes (despite how the dems manipulate words, the top 1% of the nations taxpayers pay 29% of the nations taxes; the top 5% pay over 50% www.allegromedia.com/s.../) When you research the Great Depression, it was poorly guided government policies of monetary contraction (which thankfully Bernanke is avoiding, but may lead to massive inflation down the road) and taxation that PROLONGED the depression.
The next administration is going to have a host of crisis to deal with and frankly I don't think either has a grasp on what to do.
Mr. Market has a way of working like that. Just the opposite of what most people expect is the market behavior more likely to unfold in the short term. Death by a thousand cuts over a protracted period of time may be more likely because most "investors" are still expecting that full capitulation. It may take years of slow and steady losses in a portfolio until finally nearly everyone decides (at least for awhile) to swear off equity investing for the rest of their lives. i.e. the DEATH OF SPECULATION and the return of TRUE LONG TERM BORING INVESTING WILL ONLY THEM BEGIN AGAIN.... The MACRO BUBBLE is over a generation in the making !!
When does a secular bull return? That's anyone's guess. When do behaviours and habits change? Only when one is burned severely enough for the behavior to change. Greed acquiesces to humility and moderation. For some people that time never comes... Psychiatric hospitals and Gamblers Anonymous counciling groups are filled with people who can't break the cycle of repeating the same negative behaviors over and over again.
"Bush W. inherited a fair economy which he put down the tubes."
Bush had to deal with 9-11 and the NASDAQ crash.
I'm not pro-Bush by any means, but increasing taxation during a recession is moronic. And I posted a website for you to check who gets taxed what.
As for the Depression, if you go back and look at the FDR administration, they increased taxes and prolonged the recession...read about it.
david-swensen.com/2008.../