Fri, 05/12/2008 - 06:01
Manny Weintraub, a former managing director of Neuberger Berman and now founder, principal and portfolio manager at Integre Advisors, says the focus for long-term investors should not be on the almost impossible task of calling the bottom of the market but on the opportunities opening up to acquire high-quality stocks at very low prices.
No one knows where the stock market will bottom. Current prices are far below what I believe to be fair value. However, while investors have historically been too optimistic and paid too much for stocks at the peak, by the same token they have been too pessimistic and paid too little for stocks at the bottom.
The other day I spoke with a client who managed money during the 1973-74 bear market. He described a situation very much like our current one. He and his colleagues would buy quality companies at very low valuations and then they would decline. They would then buy more shares and the stocks would decline still further.
One day in December 1974, he said, the volume just dried up. The sellers had exhausted themselves and in January the market began to rocket upwards. By the end of that year the market was up 35 per cent and by the end of 1976 the market had recouped nearly all of its losses. Now, 34 years later, my client's memories are mostly of the unbelievably low prices he was able to pay for great businesses.
No one knows what will happen this time, but in a bull market every stock goes up and while there may be good reasons for that, the reality is that there are just more buyers than sellers. A bear market is just the opposite. Everything goes down, and while there may be good reasons for that, the basic reason is supply and demand, more sellers than buyers.
This is why no-one can tell you when the market will bottom. People can tell you when things might bottom, that is, when it would make sense for the market to bottom based on the value of the businesses that make up the market. But no one can tell where it will bottom.
If there is serious money to be made from here - which I believe, which Warren Buffet believes, which market strategist Jeremy Grantham, who has been bearish for the past 10 years, believes - that must be the focus for long-term investors, and not the avoidance of an unpredictable market bottom which 34 years from now might just be a hazy memory.
I am not a cheerful Pollyanna. I sold my last bank stock in 2007, got rid of my last retailer in January, and held 28 per cent cash heading into this decline. These measures helped - not nearly as much as I would have liked - but it helped us go down less than others.
I want to share with you my current strategy:
1. Continue to avoid banks and risk-taking financials. Twenty per cent of the homeowners in [the US] owe more on their home than their house is worth. More loans are going bad.
2. Avoid retailers. As the American consumer is forced to save, retailers will suffer.
3. Avoid companies that will need to borrow money in order to pay off their debts when they come due. If credit markets do not improve, they will be forced to make dilutive equity offerings.
4. Keep a large cash position until companies bring down earnings expectations to a level they can actually beat.
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