Voices Of Calm In the Maelstrom

With Europe in turmoil and US equity markets continuing their free fall, virtually every investment professional  I know is seriously worried. However, there are a couple of voices of calm and hope in this maelstrom.

John Hussman, the portfolio manager of Hussman Funds, who has been cautious throughout the market run-up the last couple of years, is now sounding somewhat more positive in his latest weekly commentary [emphasis mine]:

With the S&P 500 trading below 1100, the U.S. stock market is now in the upper range of what I consider to be reasonable valuations. Stocks are certainly not "cheap" or undervalued overall, but they are no longer priced to deliver unacceptably poor long-term returns.

I have no strong belief that stocks have reached a bottom. Although there is an increasing likelihood of a sustained "bear market rally," I believe there is a good chance that valuations will eventually move lower still before a durable cyclical low is established.

Still, investors should recognize that normalized valuations are now the best they've been since 1995. That may not be saying much, since the total return on the S&P 500 since 1995 has averaged only about 7% annually, but it is what we might call "the beginning of wisdom."

He continued [emphasis mine]:

When the news reports are uncontroversial in reporting that the U.S. is in recession, when they suggest that there is worse news ahead, and when they indicate that nothing seems to be helping, that is when the market is more likely to register its low.

My assertion is not that we are necessarily at such a low yet, but the present sentiment of panic is typically one that presents useful opportunities for gradually scaling into market exposure, as uncomfortable as it might feel over the short term. This is what good investors get paid to do - not always immediately, but over time.

Charlie Rose did an interview with Warren Buffett last week. Buffett is also beginning to see some value:

ROSE: Cash is said to be king now. Are you sitting on a lot of cash so that this is the time for Berkshire Hathaway (BRK.A) and Warren Buffett to look carefully at a lot of opportunities?

BUFFETT: Yes. We want to use cash. The reason we haven't used our cash, two years ago, we just didn't find things that were that attractive. But when people talk about cash being king, it's not king if it just sits there and never does anything. There are times when cash buys more than other times, and this is one of the times when it buys a fair amount more. And so we use it.

ROSE: There's a time to accumulate and a time to spend.

BUFFETT: Absolutely. You want to be greedy when others are fearful. You want to be fearful when others are greedy. It's that simple.

Warren Buffett is focused on long-term value oriented and he will admit that he is not good at short-term timing. None of this indicates that the equity markets around the world will make a bottom this week or this month. They can continue to go down. However, these comments are powerful rays of hope for shell-shocked bulls.

Buffett went on and talked about a lot of other issues surrounding the current crisis. More on that later in a future post...

Comments

[Dividends A...:]

Buying to Berkshire at any point earlier this year would have been a much better investment than many of the usual suspects that have been hammered as of late. Not many businessmen can negotiate terms with large corporations like GS & GE with almost all the benefit going towards them. 10% pref yield in this environment I think is well understated by the markets and Buffett has clearly shown his ability to attain value in the most difficult environments.

Even if he views the warrants for common as essentially worthless he's getting a very attractive return for the equity invested on the behalf of Berkshire shareholders.

2008 Oct 07 10:31 AM

[Bud Labitan:]

Your mention of "voices of calm and hope" grabbed my attention. Someone said that the mark of leadership is to define reality and provide hope. And, you are correct to point out that the market prices of potential investments are approaching or going below "intrinsic value." Readers here may also enjoy "The Four Filters Invention of Warren Buffett and Charlie Munger" book. It explains and honors the intellectual partnership of two brilliant men. The genius of Buffett and Munger's four filters innovation was to "capture all the important stakeholders" in one "multi-variable" four step process. www.amazon.com/dp/0615...

It would be interesting to hear what Charlie Munger thinks of this tumultuous period in the markets. Here is a new example of the "four filter clusters" I found in Warren Buffett's latest talk with Charlie Rose on 10/01/08.

Charlie Rose: Is there an operative narrative to the kinds of investments you are making other than you look at and you buy on value, look at advantage, management, you look at a place that can absorbed the amount of money you want to invest, and you look at its prospects, and you look at price.

Warren Buffett: Yeah. They have to be pretty good size for us now to have... to move the needle. But we look for fairly large situations.
We look for things I can understand. A lot of businesses I don't understand. So some guy may know how to make money in cocoa beans, but I don't so I just let him have that. But it's got to be something I understand. It's got to be a business with fundamentally good economics. It's got to be a management that I like and trust and admire. And it's got to be a price that makes sense. And lately the price --

Charlie Rose: Prices make sense.

Warren Buffett: Prices make a lot more sense now, yeah.

How do the concepts line up? With slightly different words, like this:
1. Understandable => "things I can understand"
2. Sust.Comp.Advantage => "fundamentally good economics"
3. Able n Trustworthy Managers => "a management that I like and trust and admire"
4. Bargain Price => "it's got to be a price that makes sense"

So, you and Buffett are in agreement: You want to be greedy when others are fearful. You want to be fearful when others are greedy.
Where are the other voices of calm, hope, and sensible valuation?
Hopefully, one of the candidates will step up to the plate tonight in the second Presidential debate.

2008 Oct 07 11:05 AM

[whidbey:]

The average investor does not have the perspective and time horizon that Buffet has on investments. I suspect that large asset buys are now feasible, but stock buys by the public is not yet feasible until it is understood that consumers will not support a recovery. The unemployment levels have yet to level out which suggests that there is more down side to go before buying is indicated. The P/E on the S&P is the real marker; watch the P/E and leave Hussman alone, and above all Buffet. Both are flags in the wind, but not the wind.

2008 Oct 07 11:50 AM