All the negative news

[Hawks]

To all board Members

With the utmost respect for all members on this board which is without a doubt the most insightful and intelligent collection of insights and opinions I have ever come across in my investing research (thanks to Parsad for making all this happen), there is something I truly do not understand right now.

So many of you respect Buffett, Watsa, Parsad, Templeton, Graham, etc. as I do, but what I don't understand is why so many of you are now so negative about the values that now exist in the market.

It was Rothschild (maybe Baruch) who said "buy when blood is running in the streets".

It was Templeton who said "buy when there is maximum pessimism"

And Buffett said " buy when others are fearful".

When I read all the headlines on CNN, Bloomberg, Yahoo and Google Finance, business television, etc., all I hear and see is gloom and doom.

And yet, so many board members are going to cash, getting out of most equities, and waiting for the next 15-25% drop in the markets.  You may be right, only time will tell. But I have been trying to remember when in 2008/2009 when my RRSP (yes, I am Canadian) took a huge plunge despite what I viewed as good "margin of safety" companies. And when the days were darkest and it looked like the world would come to an end, I remembered Templeton's words of "maximum pessimism" and how he bought a boatload of stocks during the Depression and in the end, turned out to be one of the wealthiest and most insightful investors of his generation.

And now, I have come back from those depths of 2008/2009 and am close to pre-market crash (within 5%). That feels good, but the media keeps spitting out more and more negative news.

So I decided about a month or so ago, to start using my large cash postion to buy some good value large caps in the U.S.,  mixed with some small cap Cdn companies. I have lucked out in that the Cdn dollar has depreciated vs the US and that has been a "margin of safety" so far.

I could be totally wrong here, but it looks to me that the market offers good value right now (for example, huge discrepancy between Treasury yields and company earnings yields; Americans are finally building their savings again; historic low interest rates; huge cash positions and lower and lower debt levels for the best companies in America, etc.).  Are the values as good as at the bottom of 2008/2009 when all of America was on sale and as Parsad said,  "we may never see prices/values like this again in our lifetime" . I agree with Parsad on that one. But the values are good; pessimism is rampant, the "blood is running", the little guys are bailing out of equities.

 

So, here is my question:  why do so many board members (whom I respect so much for their comments and insights over the years), feel that now is not the time to buy?  how do you reconcile your value investing style with your position of "selling now", "sitting on cash", "waiting for 25% fall", etc. with what the greatest investors of all time have been telling us all these years which is to buy when all the news is negative?

 

I may be very naive about all this, and I may be too early re building my positions (someone once said that it is best to "buy too soon, and sell too soon", because no one knows the bottom) but I will "eat my own cooking" as some will say. Time will tell.

Really, sincerely interested in what all of you think about all this. Thank you in advance for your time and comments.

[Myth465]

I agree with the sentiment of your post, but tend to side with the bears. I am 80% invested and will continue to hold my stocks.

 

The issue for me is things are fairly uncertain (arent they always) and I dont see a large number of no brainers. There are plenty of dcent value ideas with 10% FCF yields but I want 20%. I aim to be rationale and think 10% return on cash is good for the risk of equities so naturally I want to buy at 20% FCF (taken from Pabrai) and sell for a double at 10% FCF to a guy who still gets a decent return.

 

I hold a few stocks which appear to have a 20% FCF (KSP, ATSG, LNET, BYD.TO) or appear to be good asset plays with catalysts (SD, ATPG, ESV), or feature owner managers who hold or can find cash to keep investing in the downturn (FUR, L, LRE, SSW, FFH (will buy soon enough)). The issue at hand is each one of these companies (except for L, FFH, FUR, and LRE) is slightly damaged and I hold all I want. I dont see any real no brainer cant lose ideas (except for maybe FFH if you ignore the insurance risks). I think Americans are just starting to wake up to risks and are getting worried / annoyed again. They have had 10 years of no returns and always get shaken out of the market so they miss the recovery. I think many will continue selling if things continue to remain jittery and may exit the market for quite a while.

 

I think one should be investing, but given the situation one must have great ideas to invest in. I dont see many of those, so why buy? Coke, JNJ, Wells Fargo, MSFT, GE, and others at 8% - 12% FCF yield wont make anyone rich. They will do a great job of protecting wealth though. I dont have wealth to protect, so I will wait for 2 - 5 x FCF with little risk before I part with the last 20% of my cash.

 

Let me know if you have any recommendations.

[Parsad]

Hawks, not sure how my name got in that list, but I hope it's there 20-30 years from now!   ;D  

 

I think the sentiment is what it is BECAUSE none of us know where the bottom is.  I'm usually early in and early out...sorry, I'm not good at timing the market.  

 

The problem is that we are almost two years out now from the bottom of the 2008 drop, and a year and a half out from the bottom of the February/March 2009 drop.  I think investors are generally anchored to the last bottom.  For people who lived through the Great Depression, the bottom was around April of 1932 and they were anchored to that for the next three generations!  

 

This time, the anchor and a fairly significant one, was the first week of March 2009, when the Dow hit 6600.  That is going to be tough for investors to let go of, even the more experienced value investors.  Guys like David Rosenberg et al, keep making us think we are going back there.  Maybe we are, maybe we aren't.  

 

All I know is that the lows of April 1932 were never, ever seen again...not in the last 78 years!  The top of July 1929 wasn't matched again for another 25 years, but people were so afraid they completely missed the bottom...which lasted all of 2 months!  And getting back up to the top from the bottom would have been a 700% return over those 22 years.

 

As I said then, I don't think we will see 6600 on the Dow again.  We may see 8500, but we won't get down to 6600.  At the end of 2008, Walmart was making about $13.4B.  At the lows in February/March 2009, Walmart's market cap fell to $170B or a multiple of 12.7.  At the end of 2010, Walmart will have earned over $15.5B in its last four quarters, and it's market cap today is $189B or a multiple of 12.2!  So during the absolute worst of the credit crunch Walmart had a higher multiple than what it has today...would you buy more or less of it if the price fell from here?  Common sense would dictate you would buy as much as you friggin' can!

 

Keep some powder dry...focus on valuation and intrinsic value.  Don't leverage, don't gamble and buy things you aren't afraid to hold for years.  Uphoria and fear are two symptoms of a manic-depressive market.  We enjoyed uphoria last year and fear is now rampant again.  Both are needed to sell newspapers, but they make awful investment weather vanes!  Cheers!

[Hawks]

Myth

I agree with you; not a huge number of "no brainers". Not like 2008/2009. But good values are there, imo.  I think Parsad commented on this as well a few weeks ago; and he put some cash to work as well.

 

You are better at numbers than I am (I have followed your posts in the past) but would suggest you check out je.un (Toronto) cash flow and "moat" grows larger each month; day (Toronto) a growing mid-cap oil play in Canada but stock price down due to crude lows in last 5 weeks, tup (love their emerging markets penetration) and visa (huge moat, despite negatives in media re credit card companies and new legislation).  In Canada, check out Goodwood funds and Irwin Michael (value guys for sure; buy $1 value for .50-60 cents; they like these 2 Cdn stocks).

[scorpioncapital]

A no-brainer is an investor looking in the rear-view mirror. There weren't any no-brainers 60% lower on the S&P because people were posting the same pessimistic, mixed world view back then just as they are now. Some people made good money investing during the great depression, not as much as in other periods but I read that including dividends and not just capital gains it wasn't as bad for many stocks, assuming you didn't leverage up 10:1 and bought the high flyers.

 

 

[SharperDingaan]

Look 6 months out & honestly ask yourself if its likely to be better for the average joe. If you can't see a compelling reason why it should be, you're really saying it can only be more of the same or worse. Buying insurance (holding cash) is simply prudence.

 

Graham may have bought well, but he was forced to sit on cigar buts that went nowhere for years. In todays world, most would argue that he would have done better by either buying less, or waiting longer before buying.

 

SD  

[Hawks]

Sharper

You said that Graham "would have done better by either buying less or waiting longer before buying".  In hindsight, decades later, you are probably right. But, how does your record match up against his, given your criticism of what he did?  How do you match up versus Graham in the last couple of decades?

 

All I am saying is that there seems to be way, way too much negative news out there today, and that is not the time to retreat and sell eveything.  That is what "lemmings to the sea" do. I  really admire Templeton, not for his religious views, but for the fact that when everyone got emotional and negative, and all the bad news kept flowing out, he kept buying.  Easy to say, "sell when stocks up, more difficult to buy lwhen they are low and going down".  Time will tell.

[Munger]

The current environment is not "blood in the streets" -- not even close. No one believes a depression is possible.  Valuations are still very high compared to historical periods of stress.

 

Current valuations do not offer an attractive margin of safety, on average.

 

Investing in long duration assets with interest rates at record lows without a huge margin of safety is a fools game.  Trading on the basis of a yield arbitrage leading to a great fool buying higher than you -- might work but who knows...good luck.

 

To compare the experience of 2008 into the early part of 2009 to the Great Depression suggests a lack of perspective.   Valuations never got near as cheap as experienced during the Great Depression.  Peak to trough decline in GDP was only on the order of 1-2%.

 

If you find a great investment with a high margin of safety, buy hand over fist.  Otherwise -- don't try to be a hero in this environment.  Large cap equities are not attractive on an absolute basis, no matter what Bill Miller says in an effort to save his business.

 

[hyten1]

i think everyone has good points, for me its pretty simple

 

do i see things getting better anytime soon (i believe in muddle through economy)? i don't so why buy now... unless its ridiculously valued. i also tend to like investment with a catalyst/special situation

 

hyten1

[Munger]

Also -- how could anyone possibly say there is "blood in the streets" when the stock market is up 50%+ from its lows...c'mon.

[Rabbitisrich]

I think the statements Hawks references are simply generalized statements about uncertainty about stock theses. Every bottom-up analysis implies a macro view, and most value investors try to mitigate an imprecise macro view with price discounts and scenario tests. Keeping cash on hand allows for maneuverability if new information comes along that blows your views apart.

 

I remember in March of last year I felt a surge of undifferentiated anxiety. I kept looking over my holdings in an unproductive fashion. It wasn't until I forced myself to be specific about contingencies that I could make some money.

[Smazz]

Keep some powder dry...focus on valuation and intrinsic value.  Don't leverage, don't gamble and buy things you aren't afraid to hold for years.  

 

Thats my train of thought also.

 

My posts may seem negative but thats just what I see.  Im not making up the housing or unemployment numbers, gdp or foreclosure rates - thats usually what I refer to without going into too much detail (I dont like to type a whole bunch :P).

 

There was a cheeky article on denial today in the WSJs digital network, youd think i could find it now?y -

[alertmeipp]

I see some posters trying to forecast the future on macro scale.

That turns investing to a guessing game. We have something better to be based on.

[alertmeipp]

Also, how do you guys view the recent M&A activities?

 

[Hawks]

Munger

The market is "up 50% plus from its lows".  But,  how do you know that these lows will probably never again be seen in our lifetime, if you are 30 years or older. Why do you think 2008/2009 lows will come back?  Is the end of the world at hand?  Sounds way too pessimistic to me.  IMO. 

Europe is way behind the U.S. in addessing its problems, the PIGS aren't even close, and China is trying to find a way to reasonably contain growth. But the US is at least working its way out of all this; not as fast as everyone would like. Especailly the midia and all the "talking heads".

Thus there are opportunities for those who like to look down the road a few years.  Do you think that Templeton bought his boatload full of stocks in the depth of the Depression because he thought he would be wealthy and right in  3 months?  one year???  or never??

[Munger]

But,  how do you know that these lows will probably never again be seen in our lifetime, if you are 30 years or older.

 

I don't know.  I readily admit that I have no clue if the lows have been seen.  What I have said and continue to say is that stocks are not attractively valued on an absolute basis -- alternatively the margin of safety is not sufficient.

 

Is the end of the world at hand?

 

No idea.  But you shouldn't think for a moment that stocks are priced for the end of the world.

 

But the US is at least working its way out of all this

 

This statement is false.  Not only is the US not working its way out of the current mess, the problems will be compounded when Japan and Europe experience further stress.

 

you think that Templeton bought his boatload full of stocks in the depth of the Depression because he thought he would be wealthy and right in  3 months?  one year???  or never??

 

If you didn't think the US was coming to an end, stocks offered an enormous margin of safety on MULTIPLE occasions during the Great Depression.

 

 

 

 

 

[alertmeipp]

Munger, when was the last time you buy stocks agressively?

[Packer16]

I know there is some negative sentiment out there but I have found at least a half a dozen or more small media names that are in the low single digit FCF range.   There are also restaurant names in the mid single digit FCF range.  In reading some of Grahams early work he seemed to use about a 10% yield for bonds, 12% for preferreds and 15% earnings yields for stocks as good buying points.  As myth has pointed out there are many high teen FCF yield firms out there, many mentioned by folks on this board.

 

Packer

[Munger]

End of 2008 into 2009 -- and even then, I was only 70% invested...if more stocks (of good companies) fell to trough valuations consistent with prior periods of stress I would have been fully invested.  Stocks bounced sooner, faster than I expected (and if truthful -- sooner, faster than virtually everyone else expected for that matter).  Still made a lot of money with only 70% invested.

[Guest broxburnboy]

I see some posters trying to forecast the future on macro scale.

That turns investing to a guessing game. We have something better to be based on.

 

Like it or not macro economic trends must be factored in to any value analysis. Any individual companies' growth projections have been partially dependent on "the rising tide floats all boats" scenario. When the tide goes out as it has say in the housing market, even the best pre-crash balance sheets couldn't withstand the "macro" trend. The rally of the last 18 months was obviously dependant on the sheer volume of liquidity (borrowed and newly created) that was pumped into the credit markets.

The fiscal and monetary stimulus has ceased and so the market has begun delevering again, until the next "helicopter drop" of newly minted money. This may revive the stock market again, but many see this as a good time to be in cash, until some sign of economic "macro" growth - new jobs created, housing market stabilise with good volume, consumers spending savings and some necessary delevering is behind us.

 

[alertmeipp]

Munger, you are much conservative than I am. You have the patience to wait for the fat pitches. I am very weak on that.

If you don't mind, would you share you track records?

 

broxburnboy, of coz, I know the bad econ general lead to bad corp profits, but my point no one can see what is going to happen 6 months out.

[Munger]

Not sure if legal and wouldn't use this as a forum to disclose anyway.

 

I do pride myself on patience and demanding a high margin of safety from Mr. Market -- no doubt I will miss upside trades but expect the approach will continue to serve me well over the long term.  

 

An example of stocks I was buying included SBUX, EBAY, WFMI, MSFT, and PCLN.  Even then, I did not believe the margin of safety was a no brainer in any of those stocks.  I did believe the risk/reward was in my favor -- high margin of safety.  I bought the stocks without any specific price target in mind.  And with the possible exception of EBAY, I don't see any of those stocks offering a great risk/reward at the moment.

[alertmeipp]

Munger,

Thanks.  Do you investing like you are now when you were younger? If not, what triggered the change?

 

 

 

[Munger]

Was fortunate to come across the writings/speeches of Buffett, Munger, and Graham at a relatively young age.  Nevertheless -- still have made plenty of mistakes primarily by not demanding a sufficient margin of safety -- with that said, I have tried to focus on good businesses with strong balance sheets...so with time, many of my mistakes were recouped as cash flows ultimately increased.  Strict discipline re margin of safety has come with experience -- Mr. Market is a tricky, sneaky bastard...I hate the guy, except when he panics. 

[rick_v]

Munger, I have a little bit of a problem with some of your points.

 

Most importantly you are miscalculating in my view what an absolute basis is for attractive valuations.

 

Please keep in mind that regardless what any of you have said here relating to deflation and economic uncertainty at the end of each year we have more fiat currency in the system. This is just how it is, and so regardless of interest rates there is more money supply in the economy.

 

Now the strongest most perfectly positioned franchises that have built their moats over decades are so well connected into the main artery of the economy so that they are able to grow the amount of currency they bring in year over year. Regardless of spending habits, over time mathematically there is more and more money in the system so naturally shares in enterprises earning a decent return of capital will always gravitate towards higher lows.

 

What I think many of you are misconstruing is the ability to deploy permanent capital in solid positions and then disregard what the market quote is for them. I manage a large amount of capital a majority of which is permanent. And so when investing for long time horizons it makes absolutely no sense to trade in and out of positions in companies I feel are attractive. Will they get more attractive? Maybe, great! I will buy more and average down. But to time a value play is impossible in my view. And my best purchases over my career have been the hardest ones to stomach. So what I like to do is construct my portfolio in a fashion that allows me to double or triple down on positions where I feel the gap between the market value and intrinsic value has widened.

 

Another point of yours which I have a problem is when you compare to Europe and Japan. Again please understand how global money supply works. If we debase our currency so will they and so there will just be more money in the world and so I truly see all of this as a type of shadow inflation which will kick in a few years down the road. But in terms of positioning I don't see a problem with today's valuations. And to me we are in a terrible time, and there is blood on the streets.

 

None of us have really lived through the great depression. I assure you it was not as bad as people make it out to be. Humans still laughed and smiled, and took long walks. People still played music and had parties. Economically, there was a vibrant wealthy class and a strong middle-class. This thought process that everyone must suffer is a little naive, it just can't be so economically as capitalism provides an atmosphere for zero sum gains. Some win and some lose. Today on average mostly everyone is losing and so I would say this is a good environment to invest. It may get better, but the points you have made on this board lead me to believe that you are either not managing a permanent base of capital or that its pretty small because over a long period of time you cannot successfully invest in scale and generate outsized returns with that type of thinking.

 

Also, when I find a value play I always start buying it early because I want to get a feel for the stock, So its hard to imagine say a stock you like today at 5 or 6 which you anticipate going to say 2-3 not being attractive enough to start building a position just in case you are wrong, especially if your time horizon is many years.

 

Finally, I would like to say that Macro-Economically it is very clear that globally central banks have thrown out every shred of responsibility when it comes to monetary policy. They will keep expanding their monetary base until things get better. And those who bet on that side will be the winners coming out of this.

 

Looking forward to your response, I know you will have one!