Market Review: November 2008 Commentary
At Tyndall we remain cautious over the global economic outlook. We do believe that the fundamentals will count again in our markets and confidence should be retained.
Tuesday, November 11th 2008, 9:57AM
-Greg Campbell, Tyndall
The intelligent investor
The month of October was nothing short of amazing. On the 27th of the month, several markets were at least 50% lower in value than what they were a few months (or, in some cases, weeks) before. Remembering that a 50% loss is the opposite of a 100% gain, the following table shows some of these market falls, as measured by certain indexes:
Yet on the very same date as these indexes had more than halved, Volkswagen AG’s share price rose to nearly five times what it had been in September, temporarily making it the largest company in the world by market cap. Volatility was obviously at extreme levels in all markets, with numerous record falls and rises. One particular statistic that I found fascinating was that of the eleven largest daily traded ranges of the New Zealand dollar relative to the US dollar since the 1985 float, nine of them occurred in the past month! Words like “extraordinary” and “historic” were simply not up to the task of explaining what happened in investment markets in October.
On October 23, famed economist Nouriel Roubini, who predicted the financial crisis back in 2006, gave a speech in London. He argued that markets were in sheer panic and becoming literally dysfunctional and unhinged. He also made the point that policymakers may soon be forced to close financial markets as the panic selling accelerates. The very next day, US stock futures ceased trading.
Roubini went on to state in his speech that “we have now reached a point where fundamentals and long term valuation considerations do not matter any more for financial markets. There is a free fall as most investors are rapidly deleveraging and we are on the verge of a capitulation collapse. What matters now is only flows - rather than stocks and fundamentals - and flows are unidirectional as everyone is selling and no one is buying, as trying to buy equities is like catching a falling knife. There are no buyers in these dysfunctional markets, only sellers and panic is the ugly state of this destabilizing game.”
While markets rallied very strongly in the week following Roubini’s speech, the start of November has seen Roubini proclaim that “the worst in markets and economies” is yet to come. I believe that if the fiscal and monetary easings that Andrew Hunt suggests in his column do not arrive, then Roubini may be right.
Incidentally, I have just reread Benjamin Graham’s The Intelligent Investor. I read it every year. Why? It is simply “by far the best book on investing ever written”, according to Warren Buffett. In fact, Buffett was asked at the Berkshire Hathaway AGM this year what texts he would recommend to an aspiring investor and his answer was chapters 8 and 15 of this book.
It has also been fascinating reading the book while the news has had a lead item about the financial/sharemarket collapse almost every night. It got me thinking how Graham himself (widely regarded as one of the greatest value investors) would be reacting to the current environment.
One of the key sentences in the book, I believe, is in Chapter 1: “This is just another of an endless series of experiences over time that have demonstrated that the future of security prices is never predictable.” While Graham was referring to investment markets of the late 1960s, that sentence is entirely apt at the current time. This truism then means that instead of trying to predict stock prices, the intelligent investor should focus on predicting and controlling their own behaviour. This includes not selling out purely because prices have fallen.
Chapter 8, though, is fascinating. In this chapter, Graham introduces the concept of Mr Market, which is what all investors should treat sharemarkets as. Basically, Mr Market is a somewhat mentally unstable business partner, who comes to you every working day and offers a price to buy every share you hold and a price to sell you every stock on the exchange. Most of the time, the prices Mr Market offers are reasonable. However, Mr Market is prone to periods (some of them lengthy) of greed, where the prices he is offering for stocks are outrageously high (although he will also buy yours for very good prices) and fear, where he is offering very little to buy your stocks (although, again, offering all stocks for your purchase at very cheap prices). Clearly the latter is the environment that we are in at the moment.
However, the huge advantage you have as an investor, and this must be stressed strongly, is that you can simply ignore Mr Market. You do not have to buy or sell when markets are weak and you do not have to buy (or sell) when markets are very strong. The discipline to act sensibly is what sorts out intelligent investors from speculators.
There is no doubt that, over the past month, stock prices became cheaper and cheaper. Have they bottomed? Is it a good time to get into equities? It is better than it was at the end of September. But then again, it may be even better at some stage in the remainder of this year or early next year. If you are sitting on the sidelines, awaiting the “optimal” entry point, the best thing to do is to put a bit in now, a bit in later and stagger your entry over a period of months. That way, if the prices go up, that’s great, whereas if they fall further, you can buy more with the same dollar investment. Again, this is intelligent investing. If you belong to a superannuation scheme (for example, KiwiSaver) you are doing this automatically.
It has been a wild ride so far in 2008 (with, unfortunately, a lot of temporary pain), and it is not over yet. Watch what the various authorities do.
Peter Lynn
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