Seven Comments on Equity Investing

1) A lament for Bill Miller. Owning Bear Stearns (BSC) on top of it all is adding insult to injury. Now, living in Baltimore, I get little bits of gossip, but I won’t go there this evening. I think Bill Miller’s problems boil down to lack of focus on a margin of safety, which is the main key to being a good value manager. During the boom periods, he could ignore that and get away with it, but not when we are in a bust phase, particularly one that hurts financials. When financials get hit, all forms of accounting laxity tend to get hit, making the margin of safety more precious.

2) Now perhaps one bright spot here is rising short interest. Short interest is a negative while it is going up, but a positive once it has risen to unsustainable levels. What is unsustainable is difficult to define, but remember Ben Graham’s dictum, that the market is a voting machine in the short run, and a weighing machine in the long run. The value of stocks in the long run will reflect the net present value of their free cash flows, not short interest or leverage.

3) Now, if you want the opposite of Bill Miller in the value space, consider Bob Rodriguez of FPA Capital. Along with a cadre of other misfit value managers, who are willing to invest in unusual long-only portfolios, aiming for absolute returns while not falling victim to the long/short hedge fund illusion, he happily soldiers on with a boatload of cash, waiting for attractive opportunities to deploy cash.

4) Retirement. What a concept amid falling housing and equity prices! Though we have difficulties at present from the housing overhang, and the unwind of financial leverage, there will be continuing difficulties over the next two decades, as assets must be liquidated and taxes raised to support the promises of Medicare, and to a lesser extent, Social Security. My guess: Medicare gets massively scaled back.

5) I get criticism from both bulls and bears. I try to be unbiased in my observations, because, amid the difficulties, which I have have been writing about for years, there is the possibility that it gets worked out. When there are problems, major economic actors are not passive; they look for solutions. That doesn’t mean that they always succeed, but they often do. So it rarely pays to be too bearish. It also rarely pays to be too bullish, but given the Triumph of the Optimists, that is a harder case to make.

6) Bill Rempel took me to task about a post of mine. I have a small defense there, and perhaps a larger point. Almost none of my close friends invests in the market. It doesn’t matter whether we are in boom or bust periods, they just don’t. These people are by nature highly conservative, and/or they are not well enough off to be considering investments in equities. They are not relevant to a post on investing contrarianism, because they are outside the scope of most equity investing. They are relevant to a discussion of the real economy, and where your wage income might be impacted.

7) To close for today, then, a note on contrarianism. When I read journalists, they are typically (but not always) lagging indicators, because they aren’t focused on the topics at hand. They get to the problems late. But when I think of contrarianism, I don’t look for opinions as much as financial reliance on an idea. Many opinions are irrelevant, because they don’t reflect positions that have been taken in the markets, the success of which is now being relied upon. Once there is money on the line, euphoria and regret can do their work in shaping the attitudes of investors, allowing for contrary opinions to be successful against fully invested conventional wisdom. But without fully invested conventional wisdom, contrarianism has little to fight.

Comments

[lorange]

re: Bill Miller and Bear Stearns. i think it was 1992 when Warren Buffett said that broker dealer financial statements were "totally incomprehensable."... Book values there are smoke and mirrors