All We Have to Fear Is Fear and Slow Economic Activity

Last week I spent two days in Boston engaging the best minds on Wall Street. Most of them, however, don't live anywhere near Wall Street or the studios of CNBC. This may explain why there was a coherent consensus among bulls, bears, and everyone in between. I was able to talk one on one with incredible minds like Burton Malkiel author of "A Random Walk Down Wall Street" and professor of economics at Princeton; Andrew Lo, finance professor at the Sloan School of Management at MIT and Chairman of AlphaSimplex Group; and Dan Fuss, Vice Chairman of Loomis, Sayles & Company managing over $58 billion. While the money managers and academics I met came from diverse backgrounds, there were three main themes all of them shared.

First, this market is cheap. From those that thought the end of the bull market should have been in 1999 to the perennial bulls, all of them found value in purchasing equities in this market. Even more remarkable was that most of the managers thought that now was as good a time as any to buy. Some had recently become fully invested, while others felt the potential downside was limited. Remember, the stock market is a reflection of what will happen in the near future, not what is happening now. Prices today suggest a deep recession, which I think is likely. If you wait until the recession is over and better times come, the market will already have drunk your milkshake.

The second idea that had consensus was the unprecedented high volatility. There were a few people who had started their careers in the 1960's who remember similar wild fluctuations, but not on a global level. I started investing in the dot.com market, which was just as frantic as today's markets, but was focused mainly on Internet stocks. While markets have been volatile in the past, the global expanse of the current market volatility trumps anything we have seen, at least until the next crisis hits. Now, all markets are volatile at the same time. How do you deal with it? Either use it to your advantage or just walk away. You decide.

Lastly, there was a lot of talk about the business cycle. Remember that? Some thought it died in the late 90s or perhaps went on vacation as investment banks securitized loans and pumped up profits artificially. However, everyone agreed that the economy has cycles and will continue to go through each phase. Thank goodness some things never change. The problem is that investors are so brainwashed into believing that the bank failures and news headlines are unique that this crisis somehow has to be different.

Just remember that this time only the global volatility in all markets at the same time is unique, but a market crash and a downward business cycle have been seen before. All that we have to fear is fear itself and slow economic activity for a while. We are currently working our way not towards a bottom, but to a point in which we say the bottom has been reached. In essence we are waiting to see the end through a rear view mirror. Only then can we move forward.

Stock position: None.

Comments

[Assetology:]

Nice post.
I like your calm and rational view of the economy and market.
When the real money moves back into the market then and only then will equities rebound and early investors will be rewarded.

Nobody can predict the bottom but selectively purchasing long positions and even using a little leverage should turn out just fine for patient investors with at least a 2-5 year horizon.

2008 Dec 09 03:26 PM

[rr0710:]

In good times, you love to wake up," he said. "Because you're going to wake up and make thousands of dollars today! Wow! It's like, 'What am I going to buy today? What new car am I going to get?' So you get up; you have to go to a sales meeting at 7:15 every morning. I'm the late one–I always come in like 7:27, 7:30. I'm the one who's always on the verge of being fired

2008 Dec 10 04:04 PM