Monthly Archives: August 2011

Earthquakes, Hurricanes and Stock Market Rallies

Strange days, indeed.

Last week we here in Virginia experienced the most severe earthquake in recorded history.  And due to the hard underlying rock strata in this part of the country, this quake was felt from Georgia to the Hudson Bay.  Most of us who experienced this shaker were impressed by its loudness; many thought it was a low-flying jet or a large lumbering truck moving through the neighborhood.  Given the general lack of experience many in the region had with earthquakes, their responses were mixed and nearly comical. One family I know, not being sure what to do in the wake of quake, ran down to their basement and huddled in a remote corner, no doubt the worst thing to do. Many ran out of their buildings after the trembling had ceased – again something the earthquake experts tell us not to do.  Luckily the damage was not widespread and in most cases modest.  The stock market rose 3.4% that day.

On Friday of last week, a major hurricane threatened the eastern seaboard and caused what might be considered major panic (perhaps fueled by the media) among the population in the area.  Early estimates suggested that Irene could cause as much as $10 billion in damage.  New York City, for the first time ever, ordered a mandatory evacuation of low-lying areas of the city.  There was concern that the New York Stock Exchange might not be able to open on Monday due to the high water and wind damage.  On Friday, the stock market rose 1.5%.

As luck would have it, Irene did not prove to be as devastating as she might have been.  Serious damage was widespread and flooding was a huge problem in many areas, but it was not quite as bad as people feared it might have been.  On Monday, once the skies were clear and the wind calm, the stock market rose 2.8%.

For someone watching the daily gyrations of the stock market (and I hope the reader is not – you should be out doing fun summer things!), the last few trading days are a bit puzzling.  The recent rally was clearly correlated with the earth quake and hurricane, but was it caused by these events?  Most reasonable people would quickly conclude that a stock market rally should not be caused by earthquakes and hurricanes.  I would agree, and I would also advise caution to anyone trying to make sense out of the tortured logic that may emerge from the commentary about these correlated events.  Despite what one might hear from the “experts” who are supposed to know these things, I would submit that almost no one really has a truly solid understanding as to why the market moves how it does on any given day.  Sure, many are asked to explain what did happen, and I think that their answers (most of the time) appear to be reasonable and might even be part of the reason, but can they really know the daily “why” of the market?  I don’t think so.

This is why I focus on the longer-term and the individual company.  We know that over time the stock market provides the best returns of any asset class.  We also can understand much better the prospects and merits of one company as opposed to “the market.”  We also know that the best time to buy stocks is when everyone else is selling.  Did you hear about Warren Buffett’s latest purchase?  He invested $5 billion in Bank of America (BAC) just at the moment when many thought the company was on the ropes.  One might say, “Yeah, but he’s a billionaire, so he can afford to lose money if the investment goes bad.”  Yet, anyone (regardless of net worth) could have stepped up that day and invested in BAC.  Buffett did, not because he is a billionaire, but because he understands the concept of value and knows how to invest against consensus opinion.

Again, the Sage of Omaha has taught us all a great lesson.  Would that we will listen and learn from it…

Don’t Take My Word for It

Truly, these are the days that try a man’s patience.

The recent market volatility is unprecedented, and surely has caused concern in the minds of many investors.  The reasons for this volatility are legion, but probably not just the simple reasons portrayed in the media.  I cannot profess to know the “real” reasons for the market’s gyrations, but I am feeling that things may not be as bad as the market is suggesting.  Ergo, this may be a buying opportunity for stocks.

Right now, stocks are being valued at an 80-year low versus bonds.  The trailing P/E on the market right now is actually lower than it was in March of 2009.  The most expensive thing out there right now appears to be “comfort.”  We all know that inexpensive valuation by itself is an insufficient reason to buy stocks, but it may provide some comfort to investors that the downside may be somewhat limited or that the rebound (when it comes) may be robust because of this low valuation.  Those of us who focus on investing in individual stocks can find solace in knowing that the companies whose stocks we own will find ways to make money in whatever new environment is presented to them.  Good companies with good management can usually seek new profit vistas no matter what.  We find this thought encouraging.

In the near-term (as always), we (like most investors) have limited clarity of vision. Yet, we are extremely hopeful that the long-term prospects for equities are very positive.  Market bottoms usually come when pessimism peaks.   It certainly feels like negativity is reaching some kind of climax.

But don’t take my word for it.  Here is what some very successful investors say about times like these:

“Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it.” – Warren Buffett.

“It’s not always easy to do what’s not popular, but that’s where you make your money. Buy stocks that look bad to less careful investors and hang on until their real value is recognized.” – John Neff.

“… we continue to believe that investing requires detailed research, independence of thought, and a willingness to act contrary to the lemming-like behavior of most. Boiled down, we have now captured these sentiments in our new tagline: Ignore the crowd.” – Bruce Berkowitz.

“When stocks are attractive, you buy them. Sure, they can go lower. I’ve bought stocks at $12 that went to $2, but then they later went to $30. You just don’t know when you can find the bottom.” – Peter Lynch.

“Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.” – George Soros.