Wednesday, November 26, 2008

The Intersection of Value & Contrarian Thought

Over the course of the last year, the most grizzly of bears have come down off the mountain, frolicked and pillaged in the market torrents and crossed the wild terrains in pursuit of the once in a generation pilgrimage to Pamplona. These grizzlies want to run with the bulls. Should we heed their transformations? By nature they are prudent beasts. Will they arrive early to the party just as they did with their warnings of an over-leveraged and frothy marketplace? Would they have been playing for the same team in 1873, 1874, 1875...1929, 1930, 1931? I realize these are moving targets, but do contrarians need to move even further out on the continuum of risk? These are some of the crosscurrents running through my brain these days.

Back in the summer of 2007 it was Richard Russell blaring the trumpets of a new bull market. The octogenarian investor/market pontificator was one of the few who picked to the day one of the great bear market bottoms of the 1970's. However, this time the usually bearish Russell seems to have been left flat footed and whipsawed by the market's bi-polar convulsions. Here he is in the summer of 2007:
"We are experiencing a global bull market of Titanic proportions. The central banks of the world now have the ability and the power to create fiat money at will." - August 30, 2007

The tragic irony of his untimely call was his continued bearish posture and skepticism throughout the 2003-2007 cyclical bull market. Even the great ones get it wrong from time to time. Today there is a bull market in the carcasses of former prescient investors and traders. To quote from Buffet once again, "It takes 20 years to build a reputation and five minutes to ruin it."

The list of financial luminaries below illustrates the depth and breath of typically conservative and tactically bearish investors that have begun buying this market.

Jeremy Grantham
"Most of the damage is behind us now and the US market is trading exactly at fair value." "We've probably stumbled into doing enough things right that the meltdown is finished," he says. "We're in for a bit of a recovery followed by a meat grinder." - November 1, 2008.

Warren Buffet
"So ... I’ve been buying American stocks. This is my personal account I’m talking about, in which I previously owned nothing but United States government bonds. (This description leaves aside my Berkshire Hathaway holdings, which are all committed to philanthropy.) If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities."

John Neff
"His current portfolio contains about seven stocks. His on-again, off-again love affair with banking giant Citigroup Inc. is on again. He famously bought a big stake in that company for Windsor in the early 1990s when bad loans in real estate and in developing countries pummeled its shares.

He has been buying Citigroup again, believing that its stellar network of offices around the world will help it thrive when the global economy recovers. Citigroup now accounts for about 13 percent of his portfolio." October 15, 2008.

Marty Whitman
"TORONTO -- Marty Whitman, the octogenarian dean of deep-value investing, sees great bargains to be snapped up from the current stock market meltdown.

"It's a great time," enthused the 83-year-old founder of New York-based Third Avenue Management LLC before speaking yesterday at a conference organized by AIC Ltd.

"We can't try to pick the bottom, but it seems to me that there are great values out there now, just like in 1974," the firm's co-chief investment officer said in an interview.

The stock market crash of 1973-74, which affected all the major stock markets around the world, lasted 694 days before bottoming out.

"Everything went down every day, and if you bought, you hit a lot of 10-baggers," recalled Mr. Whitman. "I hope that we do it with a lot of what we are doing now." September 18, 2008.

John Hussman
"As of last week, the Market Climate for stocks was characterized by favorable valuations and unfavorable market action. From the standpoint of the general approach described in the Strategic Growth Fund's Prospectus, this places us in the “moderate” yellow box. The appropriate investment strategy is to increase market exposure gradually on substantial price weakness, which is exactly what we are doing here."

Steven Leuthold
"People say we haven't seen anything like this before. They just haven't looked.""Today's stock market is quite undervalued, in the low 15 percent of our 60-year valuation history."

I am sure Nassim Taleb would have thrown out these reflections as irrelevant and completely out of perspective to this markets character and danger. He may say, "This is not your grandfather's depression, keep going out on that continuum of risk". Of course value investors would be frothing at the mouth in this environment, they have been conditioned their entire lives for moments such as these. Where else in their lifetimes have the most high quality blue-chip companies been cut in half in one year? They are paid to work in these environments. I guess that is all the information we need...

1 comment:

MethodMan said...

Most money was lost after the first crash of 29, when people kept seeing "incredible values" and the bottom over and over. The market does not price in anything, not even its own hubris.