Recently, I said that I had finally made a purchase this year, even though I was not anticipating a major market bottom. With the popularity of that article and after recent events, I want to elaborate on what I wrote there.
In terms of personal portfolio management, I’m not too concerned about the indices. Yes, they serve as a decent benchmark for comparing returns, but otherwise they are of limited use. Would I like to have the bottom be past? Well, I have some sympathy for those who have lost a significant chunk of their savings – especially those inappropriately positioned by their financial advisors. From a practical standpoint, it is easier to work with a tailwind, though I’d settle for simply a calming of the headwinds. And, the more vain part of me says that I’ve only bought on one day so far this year – March 6th – and that was the day the markets printed their year-to-date low. It would be nice to be able to say that with some sense of permanence.
Even considering those things, I continue to anticipate lower lows, if not welcome them. It’s a matter of time perspective in a sense, but I plan to be around buying assets for some time. The current market has allowed me to assemble holdings yielding 16% from companies I have confidence in. If this poll from the other week is correct; I’ll get that chance – more than half the respondents see a 2009 market low below 5,000 on the Dow Industrials. Is there a possibility we have a Japan-esque funk measured in decades, like this article suggesting were in for a crisis until 2025? Maybe there is no good reason to buy, and I should still be waiting for the bottom – though doing that for the last two weeks, from when that last article was published, would have resulted in plenty of missed gains. As the poll linked to above suggested, on the day of the bottom (so far), 90% of voters were expected to see the market go much lower. If we work under the assumption George Soros used that the majority of market participants are wrong, what does that say about future direction?
I’m not trying to pick on anyone who thinks we’re heading lower, but Doug Kass coined the best phrase I’ve heard in a while:
My main point is that we live in a Land of Johnny-Come-Lately Chicken Littles, most of whom failed to identify the credit and economic risks 1½ years ago but who today hold with alacrity and great confidence a belief in a continued dire outcome for equities, as they all too often see the world from a rear view mirror. (Kass: Printing an Important Market Bottom)
Jim O’Shaughnessy echoes Kass, and joins Jeremy Grantham in predicting outsized returns for equities going forward. Add Bill Fleckenstein to that group, and the number of bears who are louder and more optimistic than the former bulls grows again. With the exception of O’Shaughnessy, whom I haven’t followed, the people who are now positive on the equity markets are those who were ahead of the curve on seeing the existing problems. Could they be early, as they were in predicting this bear market? Sure. But their logic should absolutely give pause to all those stockpiling guns and canned goods, or at least looking to hit the panic sell button on their portfolios.
Doug Kass is obviously a very bright guy, but I’m not going to outright agree with him – yet I don’t think whether March 6, 2009 was the bottom is relevant. The real point is that it is very easy to sell right now in the face of a negative macro outlook, just as it was easy to buy in 2006 because the global economy looked so strong, the world was awash in liquidity, and all the other utterly meaningless clichés that sounded correct at the time. Investing in equities is making a statement that the future will be better than the past, and having an ownership stake in the future has been a winning formula over time. So, are we heading back to an agrarian subsistence lifestyle, or will the world’s most dynamic economy of the last century eventually work its way out of the current mess?
Again, the fact that I hear things like this is a symptom of Chicken Little syndrome. There are few believers in the current rally, and prices on a number of equity and debt issues finally reached a point where I find them attractive. I’ll leave the near-term directional calls to Doug Kass, but crazier things have happened than rallies nobody believes in from points of cheap valuation.