Deep Value

Opportunities in a High Correlation World

If the downturn is bad enough everything is correlated. You would think with credit as bad as it is the rental housing market should be doing well. But a buddy of mine that owns a few buildings called asking for referrals. He said a lot recent grads are staying with their parents longer and more single people are looking for roommates instead of one bedrooms and studios. It's getting nasty out there.


On Feb 03 03:38 PM Chris B wrote:

> In 1999, I saw that the tech bubble was about to burst, but I held
> onto my one remaining stock, Wal Mart, based on the following assumptions:
>
>
> a) Unlike the tech stocks, WMT had a reasonable PE, so it would hold
> its price even as the tech sector, and only the tech sector, collapsed.
>
>
> b) As investors fled technology, their money would flow into high-quality
> stocks.
>
> Well, as everyone knows, WMT never again reached its high near $70.
> Investors sold WMT down to the $40's to cover their tech losses,
> and few new buyers stepped forward because tech had wiped them out.
> Meanwhile, new money didn't flow into different sectors of the stock
> market, it flowed into cash!
>
> In hindsight, I should have seen the ENTIRE MARKET as one sector
> in investors' portfolios, competing with cash, real estate, currencies,
> commodities, commercial paper, treasuries, private businesses, property,
> etc. I should have thought of market participants not as a fickle
> herd bouncing from sector to sector in the stock market, but as short
> sellers caught in a squeeze, retirees who had lost future income,
> or leveraged index buyers/sellers. When things go badly, they simply
> hit the "sell" button on their browser. Selling out is much easier
> to do now than it was 30 years ago!
>
> Thus, anything that can be bought or sold through your online broker
> is correlated, perhaps irrationally. For investors who want to protect
> their portfolio balances, that leaves few options. Hedge funds and
> short ETF's have multiplied in the last 10 years, but their shortcomings
> are becoming obvious. Even commodity ETF's have failed to preserve
> value this time around. The reason: they all have a "sell" button.
> Soon, treasury and gold investors will learn this lesson, as they
> too have sell buttons now.
>
> Thus, if you want portfolio or income stability, buy a rent house
> (and don't overpay), a timber tract, a professional education, or
> a CD ladder. The illiquidity of these investments is what makes them
> less correlated with the more liquid securities market.