Why I Don't Care If We Are In a Bear Market, and Some Random Articles for the Week That Started the Bear Market Talk
Actually, the talk of a bear market has been ongoing for months, if not years. However, this is the first week where I am seeing sentiment shift marktedly towards the bear camp. It wouldn't have been hard for anyone reading or watching any of the media to see mention of the Dow possibly entering a bear market after the unofficial definition of a 20% drop occurred. Given that the broader S&P 500 and technology-heavy NASDAQ haven't dropped 20%, is it really a bear market? Who knows? Who care?
This would be my first bear market--assuming we are entering one. I actually invested some money in the stock market back in late 1999 or 2000 but I wasn't seriously pursuing investing back then (it also wasn't a lot of money given that I was in university and cash-strapped--this was a good thing or else I would have done a lot of dumb things and probably lost it all :)). I remember caring a lot more about bear markets when I first started investing about 4 or 5 years ago. Nowadays, I really don't care after switching my investment strategies and learning some things for the Oracle.
The first reason I don't care about a bear market is because I'm more a bottom-up investor and into contrarian, out-of-favour, investments. If you are a bottom up investor (value investing would be one such style), you are picking specific companies which may do well even if others are failing. As for contrarian situations, they are not impacted much by the broad market because they are already beaten-up pretty badly. If you ever read David Dreman's monumental book on contrarian investing, Contrarian Investment Strategies in the Next Generation, you'll notice that out-of-favour stocks tend not to decline much if there is further bad news. This is not to say that you won't take paper losses or that the contrarian investment won't go bankrupt; all it means is that, in general, the contrarian stocks decline less than the popular stocks if there is bad news.
For example, I'm looking at newspaper stocks and a lot of them have severe negative news priced into them. Whether we enter a recession or not likely has little impact on them because the market is already pricing in huge declines in advertising from other threats such as the Internet. I'm not recommending newspaper stocks (for all I know this could a dying industry in a secular decline as analyst consensus holds) but it provides an example of why further bad news on, say, the economic front probably won't do much.
Related to the above point, even if we enter a bear market, some industries may have already posted most of their declines. This is just a guess (and I'm not a good guesser) but I think financials and retailers may not drop much from here (again, it depends on the specific stock so don't blindly assume that every stock will be fine). In contrast, the high-flying technology stocks or the energy complex looks vulnerable. I also don't feel that the traditional safe havens during a slowdown, healthcare and consumer staples, will do well. Both of these look expensive on a P/E basis. For example most of the branded consumer staple companies have above-market P/E hovering around 17+. So, it all comes down to what industry you are picking during a bear market.
The other reason I don't care about bear markets, and in fact look forward to them to some degree, is that they provide buying opportunities. If you are young and/or don't have a lot of money and/or have a long investment time horizon, then bear markets may provide once in a decade buying opportunities. My investment time horizon is not 5 years or even 10 years; rather, it is 30 years (hopefully :) ). It was very difficult to find decent companies trading at, say, a P/E of 10 a few years ago. Now, practically the whole financial sector is trading around that. Retailers of all stripes had been on an ascent over the last 5 years but now practically all of them (except some select ones like Wal-mart) are down 30% to 60% (from peak). If you found some of your favourite picks trading at prices out of reach, you may find an opportunity to pick them up during the bear market (if they actually correct for irrational reasons.) Value investors reading this blog may find this to be a bizarre pick, for me, the dream pick would be something like Amazon (AMZN). If it drops 50% and its P/E goes under 15 or maybe above 100 (depressed earnings), I would take a look at it (this is assuming it dropped due to poor near-term outlook and not due to deterioration of competitive position).
Having said all that, I hold the opinion that if I can't survive a bear market then I am not a good investor and probably am not cut out for investing (but you need to look at the full cycle and not at the bear market bottom.) Enough of my commentary...
Articles I Found Interesting
Here are some articles I found interesting. As usual, there is no rhyme or pattern to my list. Some may not help you with investing--it may even turn you off investing ;)
Can Anyone Spell HyperInflation?
The 21st century isn't starting off well when the beautiful country formerly known as Rhodesia falls apart with hyperinflation, while its "elected" dictator is indifferent to the suffering of everyone. WSJ Marketbeat had a blog entry touching on Zimbabwe's hyperinflation:
(source: WSJ Marketbeat. Chart originally from Zimbabweanequities.com)
Capital markets often have interesting benefits to society and here is one such example, where you are able to compute exchange rates using the difference in prices of identical shares. This is not an accurate result given that liquidity, investor sentiment, and various other factors can impact prices. Nevertheless, it provides a guide when the government manipulates everything.
I hate to think how much Zimbabwe has fallen apart. Believe it or not, when I was small (maybe around 10) I temporarily lived in Zambia, which borders Zimbabwe, for a few months. At that time, Zambia was thought to be in a worse shape (based on my impression of what my parents were saying at that time.) Zimbabwe was doing well and it seemed destined to be a successful African country (such as Kenya.) Unfortunately, history didn't turn out that way. If Zimbabwe ever recovers and if anyone is visiting Africa, Zimbabwe arguably has the best waterfall on the planet: Victoria Falls (this border Zambia so you can visit from Zambia too.) It also has some good wildlife parks. I really don't know what is going to come of Zimbabwe :(
China & The Hot Money Problem
You know I'm not a pure value investor by noticing how I pay attention to a lot of macro stuff. The Economist, which is one of my main reading sources, has an article on the problems faced by China due to the hot money (aka speculative money) flowing into it. Here is a chart that they had (note that the chart is a crude estimate):
The problem faced by Chinese central bankers is to weaken the hot money flow while not harming the economy. Here is a quote capturing the essence of the problem:
Think about the inflation problem. If too much money flows in, it causes inflation (too much money chasing too few goods.) So the central bank can raise interest rates or tighten bank reserve requirements to cool inflation. But, to combat inflation, if they raise interest rates or let their currency appreciate, it will attract even more hot money. So what should they be doing?
I think there is going to be a bust (or a slowdown of some sort). Hopefully, for the sake of Chinese and everyone else, it won't be a severe one. I have a bad feeling that this is following the path of present-day Vietnam. Vietnam was really hot a few years ago so money was flowing into it (it was even called a mini-China.) I wasn't following Vietnam closely but my impression was that the market was thinking that the Vietnamese Dong was going to appreciate and economic growth was going to be strong for a long time, if not forever. Well, due to a bunch of reasons, including too much hot money flowing into the country, we ended up with high inflation. Now we have a situation where there is high inflation along with a weakening currency. I'm not saying the exact same thing will happen in China but there are some similarities.
Riches To Rags
Yes, you read that right: riches to rags! Not quite something to inspsire you. The Toronto Star has an article about Rudi Sagl, a developer of police radar detector, who went from a millionaire to living on government paychecks. This has nothing to do with investing per se and is more on the gossipy side so skip it if you wish. For a quick summary for those not reading the article, it goes like this... Rudi Sagl becomes a multi-millionaire off the radar detector boom in the 90's. His company runs into problems and he ends up losing it. Then he ends up losing all of his wealth (according to his account--I don't believe all of it) to divorce payments to his wife.
The article basically re-affirms what Buffett has said numerous times: marrying the right person is very important in life. I'm still single and love is the hardest thing in life for me :( but all I know is that if I mess things up with love, it's all over. With a nasty divorce, you can face problems that you never imagined was possible (not to mention the impact on kids or stuff like that)...
6 Questions for McCain and Obama
McCain and Obama answered 6 questions from Fortune magazine... politicians keep changing their mind all the time... not to mention the fact that they say one thing and do something else (George Bush's fiscal conservatism comes to mind)... but it's still worth checking out where they stand...
The Second Great Depression?
Some of the bearish readers of this blog may be in good company with Warren Brussee, author of The Second Great Depression: Started 2007/2008 Ending 2020 - 2nd Edition. Then again, this might be too scary even for the bears. Jim Puplava of Financial Sense Newshour conducted a radio interview of Warren Brussee a few weeks ago, where the author outlines his reasoning for expecting a depression on par with the the one in the 1930's (click on one of the mp3 or streaming links on the linked site to hear the interview).
This interview was conducted a few weeks ago but I just got around to hearing it. In true philosopher fashion, I like to hear and debate those with opposing viewpoints. I often seek out dissenting views for my investments. Sometimes, when reading a message board for an investment I'm contemplating, I skip the bullish views and spend most of my time reading the bearish views. I think everyone should read the dissenting views and see you can defend your position. This goes for anything in life--even politics or science or art. Anyway, anyone expecting a great depression is certainly taking an opposite position from me.
For what it is worth, Warren Brussee seems to have been prescient in calling for the housing bust and the unfolding credit contraction. His first edition of the book (published in 2005) supposedly predicted a bust in 2007 or 2008. Unlike many others calling for a severe bust, Warren Brussee actually put some hard dates which turned out to be correct.
He is also predicting a very long depression, stretching from 2007 to 2020. Yikes!
The evidence for expecting the Second Great Depression comes from the author's numerical analysis of various factors (such as when option ARM mortgages peak; the collapse of the American auto manufactuers and the resultant impact; etc.) Some of the scary predictions include a 70%+ drop in the stock market from the 2004 level, and 15% unemployment. Unemployment was supposedly 30% during the Great Depression but the author expects government to intervene and keep it at around 15%.
It was also mentioned that the depression may entail increasing prices in most items (except stocks and real estate), whereas the Great Depression resulted in almost everything deflating.
As for investing, the author suggested TIPS (treasury inflation-protected securities) in his 2004 version of the book. Right now he is more sanguine about TIPS given the big run-up in price and low yield.
Since I haven't read the book I can't pick off his points and critique it well. All I can say is that, like most superbearish views, everything is pinned on the collapse of consumer debt. I think it all comes down to what actually materializes. Everyone knows that it doesn't make any sense for Americans (and now Canadians too if I'm not mistaken) to have zero to negative savings rate. People living outside their means via debt is unsustainable; so is government spending without any concern for fiscal prudence. All this is going to unwind--I have no issue with that. The real question is how bad this will get. Will we have an orderly reversal or is it going to be a diaster?
I don't know. I'm investing as if we won't get another depression... but as Keynes has said, if conditions, I change my mind :)
This would be my first bear market--assuming we are entering one. I actually invested some money in the stock market back in late 1999 or 2000 but I wasn't seriously pursuing investing back then (it also wasn't a lot of money given that I was in university and cash-strapped--this was a good thing or else I would have done a lot of dumb things and probably lost it all :)). I remember caring a lot more about bear markets when I first started investing about 4 or 5 years ago. Nowadays, I really don't care after switching my investment strategies and learning some things for the Oracle.
The first reason I don't care about a bear market is because I'm more a bottom-up investor and into contrarian, out-of-favour, investments. If you are a bottom up investor (value investing would be one such style), you are picking specific companies which may do well even if others are failing. As for contrarian situations, they are not impacted much by the broad market because they are already beaten-up pretty badly. If you ever read David Dreman's monumental book on contrarian investing, Contrarian Investment Strategies in the Next Generation, you'll notice that out-of-favour stocks tend not to decline much if there is further bad news. This is not to say that you won't take paper losses or that the contrarian investment won't go bankrupt; all it means is that, in general, the contrarian stocks decline less than the popular stocks if there is bad news.
For example, I'm looking at newspaper stocks and a lot of them have severe negative news priced into them. Whether we enter a recession or not likely has little impact on them because the market is already pricing in huge declines in advertising from other threats such as the Internet. I'm not recommending newspaper stocks (for all I know this could a dying industry in a secular decline as analyst consensus holds) but it provides an example of why further bad news on, say, the economic front probably won't do much.
Related to the above point, even if we enter a bear market, some industries may have already posted most of their declines. This is just a guess (and I'm not a good guesser) but I think financials and retailers may not drop much from here (again, it depends on the specific stock so don't blindly assume that every stock will be fine). In contrast, the high-flying technology stocks or the energy complex looks vulnerable. I also don't feel that the traditional safe havens during a slowdown, healthcare and consumer staples, will do well. Both of these look expensive on a P/E basis. For example most of the branded consumer staple companies have above-market P/E hovering around 17+. So, it all comes down to what industry you are picking during a bear market.
The other reason I don't care about bear markets, and in fact look forward to them to some degree, is that they provide buying opportunities. If you are young and/or don't have a lot of money and/or have a long investment time horizon, then bear markets may provide once in a decade buying opportunities. My investment time horizon is not 5 years or even 10 years; rather, it is 30 years (hopefully :) ). It was very difficult to find decent companies trading at, say, a P/E of 10 a few years ago. Now, practically the whole financial sector is trading around that. Retailers of all stripes had been on an ascent over the last 5 years but now practically all of them (except some select ones like Wal-mart) are down 30% to 60% (from peak). If you found some of your favourite picks trading at prices out of reach, you may find an opportunity to pick them up during the bear market (if they actually correct for irrational reasons.) Value investors reading this blog may find this to be a bizarre pick, for me, the dream pick would be something like Amazon (AMZN). If it drops 50% and its P/E goes under 15 or maybe above 100 (depressed earnings), I would take a look at it (this is assuming it dropped due to poor near-term outlook and not due to deterioration of competitive position).
Having said all that, I hold the opinion that if I can't survive a bear market then I am not a good investor and probably am not cut out for investing (but you need to look at the full cycle and not at the bear market bottom.) Enough of my commentary...
Articles I Found Interesting
Here are some articles I found interesting. As usual, there is no rhyme or pattern to my list. Some may not help you with investing--it may even turn you off investing ;)
Can Anyone Spell HyperInflation?
The 21st century isn't starting off well when the beautiful country formerly known as Rhodesia falls apart with hyperinflation, while its "elected" dictator is indifferent to the suffering of everyone. WSJ Marketbeat had a blog entry touching on Zimbabwe's hyperinflation:
Amid political chaos this week, residents scrambled to buy foreign exchange, sending the value of the Zimbabwean dollar ever lower. The Old Mutual Implied Rate, used as an unofficial proxy for the value of a Zimbabwean dollar, estimates that one U.S. dollar today is worth Z$64,575,990,281, which is more than Thursday, when it bought about Z$62 billion, but down from a peak of about Z$80 billion Tuesday, according to the Web site ZimbabweanEquities.com.
Financial-services firm Old Mutual lists shares in both London and Harare, among other places; observers can calculate — roughly — what a Zimbabwean dollar is worth using share prices on both exchanges.
The OMIR doesn’t necessarily correlate to the rate you’d get on the street. But foreign exchange is the easiest store of value in Zimbabwe these days, said Rob Stangroom, who runs ZimbabweanEquities.com as well as other sites on African companies.
(source: WSJ Marketbeat. Chart originally from Zimbabweanequities.com)
Capital markets often have interesting benefits to society and here is one such example, where you are able to compute exchange rates using the difference in prices of identical shares. This is not an accurate result given that liquidity, investor sentiment, and various other factors can impact prices. Nevertheless, it provides a guide when the government manipulates everything.
I hate to think how much Zimbabwe has fallen apart. Believe it or not, when I was small (maybe around 10) I temporarily lived in Zambia, which borders Zimbabwe, for a few months. At that time, Zambia was thought to be in a worse shape (based on my impression of what my parents were saying at that time.) Zimbabwe was doing well and it seemed destined to be a successful African country (such as Kenya.) Unfortunately, history didn't turn out that way. If Zimbabwe ever recovers and if anyone is visiting Africa, Zimbabwe arguably has the best waterfall on the planet: Victoria Falls (this border Zambia so you can visit from Zambia too.) It also has some good wildlife parks. I really don't know what is going to come of Zimbabwe :(
China & The Hot Money Problem
You know I'm not a pure value investor by noticing how I pay attention to a lot of macro stuff. The Economist, which is one of my main reading sources, has an article on the problems faced by China due to the hot money (aka speculative money) flowing into it. Here is a chart that they had (note that the chart is a crude estimate):
The problem faced by Chinese central bankers is to weaken the hot money flow while not harming the economy. Here is a quote capturing the essence of the problem:
Massive hot-money inflows present two dangers to China’s economy. One is that capital could suddenly flow out, as it did from other East Asian countries during the financial crisis a decade ago and Vietnam this year. China’s economy is protected by its current-account surplus and vast reserves, but its banking system would be hurt by an abrupt withdrawal.
A more immediate concern is that capital inflows will fuel inflation. The more foreign capital that flows in, the more dollars the central bank must buy to hold down the yuan, which, in effect, means printing money. It then mops up this excess liquidity by issuing bills (as “sterilisation”) or by lifting banks’ reserve requirements. But all this complicates monetary policy. China’s interest rates are below the inflation rate, but the PBOC fears that higher rates would attract yet more hot money and so end up adding to inflationary pressures. The central bank has instead tried to curb inflation by allowing the yuan to rise at a faster pace against the dollar—by an annual rate of 18% in the first quarter of this year. But this encouraged investors to bet on future appreciation, exacerbating capital inflows. Since April the pace of appreciation has been much reduced, in a vain effort to discourage speculators.
Think about the inflation problem. If too much money flows in, it causes inflation (too much money chasing too few goods.) So the central bank can raise interest rates or tighten bank reserve requirements to cool inflation. But, to combat inflation, if they raise interest rates or let their currency appreciate, it will attract even more hot money. So what should they be doing?
I think there is going to be a bust (or a slowdown of some sort). Hopefully, for the sake of Chinese and everyone else, it won't be a severe one. I have a bad feeling that this is following the path of present-day Vietnam. Vietnam was really hot a few years ago so money was flowing into it (it was even called a mini-China.) I wasn't following Vietnam closely but my impression was that the market was thinking that the Vietnamese Dong was going to appreciate and economic growth was going to be strong for a long time, if not forever. Well, due to a bunch of reasons, including too much hot money flowing into the country, we ended up with high inflation. Now we have a situation where there is high inflation along with a weakening currency. I'm not saying the exact same thing will happen in China but there are some similarities.
Riches To Rags
Yes, you read that right: riches to rags! Not quite something to inspsire you. The Toronto Star has an article about Rudi Sagl, a developer of police radar detector, who went from a millionaire to living on government paychecks. This has nothing to do with investing per se and is more on the gossipy side so skip it if you wish. For a quick summary for those not reading the article, it goes like this... Rudi Sagl becomes a multi-millionaire off the radar detector boom in the 90's. His company runs into problems and he ends up losing it. Then he ends up losing all of his wealth (according to his account--I don't believe all of it) to divorce payments to his wife.
The article basically re-affirms what Buffett has said numerous times: marrying the right person is very important in life. I'm still single and love is the hardest thing in life for me :( but all I know is that if I mess things up with love, it's all over. With a nasty divorce, you can face problems that you never imagined was possible (not to mention the impact on kids or stuff like that)...
6 Questions for McCain and Obama
McCain and Obama answered 6 questions from Fortune magazine... politicians keep changing their mind all the time... not to mention the fact that they say one thing and do something else (George Bush's fiscal conservatism comes to mind)... but it's still worth checking out where they stand...
The Second Great Depression?
Some of the bearish readers of this blog may be in good company with Warren Brussee, author of The Second Great Depression: Started 2007/2008 Ending 2020 - 2nd Edition. Then again, this might be too scary even for the bears. Jim Puplava of Financial Sense Newshour conducted a radio interview of Warren Brussee a few weeks ago, where the author outlines his reasoning for expecting a depression on par with the the one in the 1930's (click on one of the mp3 or streaming links on the linked site to hear the interview).
This interview was conducted a few weeks ago but I just got around to hearing it. In true philosopher fashion, I like to hear and debate those with opposing viewpoints. I often seek out dissenting views for my investments. Sometimes, when reading a message board for an investment I'm contemplating, I skip the bullish views and spend most of my time reading the bearish views. I think everyone should read the dissenting views and see you can defend your position. This goes for anything in life--even politics or science or art. Anyway, anyone expecting a great depression is certainly taking an opposite position from me.
For what it is worth, Warren Brussee seems to have been prescient in calling for the housing bust and the unfolding credit contraction. His first edition of the book (published in 2005) supposedly predicted a bust in 2007 or 2008. Unlike many others calling for a severe bust, Warren Brussee actually put some hard dates which turned out to be correct.
He is also predicting a very long depression, stretching from 2007 to 2020. Yikes!
The evidence for expecting the Second Great Depression comes from the author's numerical analysis of various factors (such as when option ARM mortgages peak; the collapse of the American auto manufactuers and the resultant impact; etc.) Some of the scary predictions include a 70%+ drop in the stock market from the 2004 level, and 15% unemployment. Unemployment was supposedly 30% during the Great Depression but the author expects government to intervene and keep it at around 15%.
It was also mentioned that the depression may entail increasing prices in most items (except stocks and real estate), whereas the Great Depression resulted in almost everything deflating.
As for investing, the author suggested TIPS (treasury inflation-protected securities) in his 2004 version of the book. Right now he is more sanguine about TIPS given the big run-up in price and low yield.
Since I haven't read the book I can't pick off his points and critique it well. All I can say is that, like most superbearish views, everything is pinned on the collapse of consumer debt. I think it all comes down to what actually materializes. Everyone knows that it doesn't make any sense for Americans (and now Canadians too if I'm not mistaken) to have zero to negative savings rate. People living outside their means via debt is unsustainable; so is government spending without any concern for fiscal prudence. All this is going to unwind--I have no issue with that. The real question is how bad this will get. Will we have an orderly reversal or is it going to be a diaster?
I don't know. I'm investing as if we won't get another depression... but as Keynes has said, if conditions, I change my mind :)
Comments
Post a Comment