Back when the selling was unrelenting a lot of people got very scared, there were very emotional comments left on this blog along with many other sites a I read. People felt (and maybe they still do) that stocks are a scam or don't work and that many stocks would be going to zero as this is "clearly" the second coming of the great depression or worse.Throughout the ordeal, actually long before it started, I tried to brace myself, my firm's clients and blog readers for what could be coming. While I certainly got many details wrong the vast majority of truisms that I rely on and wrote about panned out one way or another. Things like denial of the turn to bear, certain types of stocks (like industrials and materials) going down a lot during bear markets, usually much more than the broad market. Also part of the process is big rallies that turn out to be head fakes until one of them turns out to be the real thing. Also part of this every time is rampant fear about this time being different and how the past episodes were obviously not that bad.
All of these things repeat every time, albeit with different details, and for some people there is simply no getting them to realize it.
Regardless of what comes next, take a look at a bunch of stocks you follow or have simply heard of and look at a good cross section. Here are some examples. Deere & Co (DE) fell from about $94 down to $25 at the March low and has rallied 88% up to $47. BHP Billiton dropped from about $95 down to $24 at its low and has more than doubled to $52. Royal Bank of Canada (RY) dropped from $59 down to $22 and has rallied 72% to $38. Transocean (RIG) dropped from $161 down to $42 at its low and has gone up 76% to $74. Even Starbucks has rallied 75% from its low.
I don't own any of those names they are just random examples. Just as hideous declines every so often are normal so are massive snapbacks up to a point. In trying to convey that this time was not different no matter how scary it might have been or might yet become I think a better way to phrase it might be to say that for the overwhelming majority of companies it will not be different. For Fannie, Freddie and AIG this time was different, in the last big one it was different for Worldcom and Exodus Communications et al but for most others it was not different.
As an example RIG probably going to be a big energy services provider for a very long time and RY is going to be a big Canadian bank for a very long time regardless of whether either one is a good stock pick or not. While it is reasonable to have your confidence shaken when a stock you own drops 75% most of the non-financial stocks that dropped that much in this bear market were simply never headed to zero and will at some point make a new high.
This should not be taken as an argument for buy and hold because I believe in trying to avoid declines like this at the portfolio level. The point, and it is easier to make now than it was two months ago is that the fear triggered by these events always exceeds the reality. In 2002 many tech companies with no revenue went bust and they were the vast majority failures. On this go around many financial companies that were too reckless (or whatever description you prefer) will fail and they will be the vast majority of failures.
Reading this now you might agree with me about fear exceeding reality but some of the people that do see my point now will forget on the next go around. Obviously some reading this will think I am 180 degrees wrong about this and for those folks they might want to take some of their 70-80% bounce names off the table right now.
18 comments:
Hey, you forgot my good buddy Ford (would have been nice if I had waited another week before taking a hunk off the table though).
Roger,
I agree with you, however journalism did its part (big part). After we hit S$P 666, CNBC brought on Louis Yamada who said that we will hit 500 and this pop to 750 would soon be over. The start was "well, we do not know what is going on and I mentioned to my producers lets bring on Mrs. Yamada that will tell us what is going on". Even two Tuesday back Nicole Elliott mentioned that in a day or two the market would start going down. The most rational comment that I have seen is that Warren Buffett told some kids on a visit to Omaha when WFC was trading at 9 that he has never seen such an undervalue stock. I remember in January 2008 CNBC hosts were telling people that they had never seen such undervalue stock like citybank trading at 45, it must be a steel. The biggest problem that I have is the financial TV channels that I think should only report facts and should not have people give advise to us mortals. Ever since I started watching CNBC my performance has gone down.
My feeling is that you are better than Louis Yamada, Nicole Elliott and the rest. One last, look at the guys that are looking for the tops shorting this market and burning capital. I feel really sorry for such people, and lucky to tune in on your blog who does not come out with crap.
Jeff, Milan Italy
Good morning Roger.
What are your thoughts on energy? I figgure energy is and will be one of the biggest growth areas for the foreseeable future. Specifically, I like nuclear energy.
Once upon a time, I bought Westinghouse, thinking that more nuclear power plants would be needed. It was too soon after 3 Mile Island. So for many years we built no nuclear power plants.
When a nuclear power plant is built, a lot of concrete is poured and a lot of reinforcing steel (and in the near future plastic) is placed as that concrete is poured. One of the major players in placing that reinforcing steel in North America is an outfit that used to be called Harris Steel of Toronto, Ontario.
I got interested in Harris when I read a Barrons article about them, and wish I'd bought the stock, I would have profited handsomely when Nucor bought them out. It took a lot of digging to find that company when I only recalled the article and not the name of the company.
So, now I'm thinking of taking a position in Nucor. How do you like Nucor? They do a lot of things right, and provide a lot of products and services.
CNBC may work for Roger, but like a previous post I think it sucks.
I try to remind myself that watching and listening to folks on CNBC costs me roughly $50/hour in losses. When you start thinking about it that way, I can not afford to watch the free information on CNBC.
I do watch Bloomberg and I do watch CNBC World when squark box Europe is on. I really like squawk box europe. They generally do not tout stocks (or I fast forward) They take a more arms length less emotional perspective on the US market.
I started following CNBC europe during vacations to europe in the 90's I think I have made many times the money I spent on the trips to europe :)
jeff in milan,
i worked with a large institutional "buy side" firm for 26 years. investment professionals at both buy side and sell side (the brokers who sold stuff to he buy side) often said "if i could really PREDICT what is going to happen, i wouldn't be working here, I would be working for myself." and they invvariably meant that they would be investing their own money to MULTIPLY their wealth, not setting up their own firms (with a lot of hassles with which to cope) to sell an advisory newsletter.
you should ask yourself why louise yamada or any of the other people you refer to would share ANY info they possessed that had an substantial value. i assert that they wouldn't and that they don't. warren buffett has a great record, but how often has buffett come right out and said "i am buying xyz today because it is so blah blah blah."
you need to consider that the people on cnbc don't know everything (and roger having been a guest on cnbc will probably be first in line to wisely admit that he doesn't because he tells the readers of this site that very fact repeatedy) and they will almost never tell you anything valuable because they will almost always want to make further moves on any valuable information.
you might want to forget the opinions of the cnbc commentators and just listen to the facts that they might offer. personally, i don't watch cnbc at all except for an occasional episode of cramer--but only for entertainment.
good luck,
gjg49
this is an interesting comment thread about why do anything publicly. CNBC, writing etc.
some good fuel for a post or video.
as a less important part of it, for now i will say that in 4 1/2 years of occasional TV appearances I have met some people I would have never otherwise met which is kind of fun.
Roger- if you have not seen this yet, Grantham just issued his latest quarterly report. He anticipates this rally to go to SPX 1,000-1,100. For those looking to short via SDS or whatever you may want to wait?
http://seekingalpha.com/article/136114-jeremy-grantham-collapse-is-over-but-monumental-challenges-remain
Anon 7:40,
I had read Grantham's latest report and it appears he is hedging his outlook more than ever. My understanding is that he states we could see a pull back now and than go up to 1,000-1,100 later this year OR if this massive rally continues up to 1,000-1,100 than expect a pull back??
thanks for the link i will take a peek. I will say regardless of what is coming next big moves tend to bring out the extrapolators. We see this in oil markets, currency markets and of course equity markets.
I went VERY small with SDS to start in case I am wrong (too early to be wrong yet) but calling for another 10-20% after a 35% move is an extrapolation even if the guy doing it is much smarter than me.
Off topic with the post, but on topic with spirit of the blog ... the people across the street from me just foreclosed. Call me a pessimist or a good judge of character, but when these people bought the house we knew it was a matter of when, not if. What floors me is that they had a hot tub installed last month. 1 month away from foreclosure and you're having a hot tub installed? They have a boat, the kids all have fancy toys like motorcycles. All with no place to put 'em for now.
I don't know if people don't understand living beneath or at least within their means or they just don't care.
I believe the situation I described is the overwhelming majority of what's behind home foreclosures. Not the sad, unfortunate stories you see in the news.
Anon 7:40 thanks for the link to Grantham. It appears he has placed the odds of a short term pull back at 1 in 3 and the odds of establishing a new low in the "future" at 1 in 5. It appears he has a market outlook bias towards 1,000-1,100 but whom knows? Grantham also states that the smart money was reinvesting cash into equities at SPX 667 or SPX 740 after such a massive decline. Roger, I am curious if you had reinvested into the market after the Feb/early March selloff?
not knowing your neighbors, obviously, there is a personality type that seeks out the sort of living on the edge you describe. the events of the last year or two mean that more people have to now face the conseqeunces of the edge.
I can't relate in the least but i know the personality tpye does exist.
anon 8:03, i bought a couple of things before lows looking to have more exposure in case there was a bounce (read I was early).
All- Grantham's appendix (page 8) is an interesting forecast. 56% chance of setting a new low however if you are a firm beleiver in Branch #1 (rebound late this year/early 2010) the odds are much lower and dclning every day!
They are NOT random samples, you simply picked good stocks that got illegally short sold to the bottom so wall-street could steal 401K monies.
Then wall-street takes your tax dollars and buys low, pumping the stocks back up.
Your drivle is very anonying, you have nothing to actually say about specific companies and investing.
um no, they were random off the top of my head.
if you feel that way why visit the site, read the content and then take the time to comment?
you are stealing your own time.
Roger, the last anon post made me think of something I saw a few months back; I looked at the stocks traded for a UK bank one day and they were many times the actual amount of total stocks existing. I think this coincided with a ban on short selling of the banks over there.
This was naked shorting, right? So, could hedge funds now be engaged in naked buying? Will they all cover once enough unwitting investors are convinced the recovery is here, or maybe once the S&P hits its 200dma?
do you mean the volume was more than the shares outstanding? that can happen without naked shorting.
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