Reluctant Bull Market...Road to Riches or over a cliff?
May 16, 2009
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I am guilty of being the eternal optimist, and that has cost me a great deal, as I ignored the pending fallout of the subprime mess, which created a credit crunch, and turned a necessary correction into the closest thing we have seen to a depression in many of our lifetimes.
I have read the doom and gloomers, and seen them featured prominently on television. Many of them are perma-bears who finally got one call right; others were prescient. In my estimation, the only ones worth listening to, are the ones who actively manage money. All the professors and self-proclaimed experts that the perma-bears love to parade as evidence, have nothing at stake, and therefore have no credibility, in my book.
Jim Rogers, an extraordinarily successful investor, mainly in commodities, and emerging markets (long before they were covered by ETF's) is one of the only investor's I respect that made the case to sell everything in the summer of 2007 when the Dow was approaching 14,000. That call would have made you money. That call was extraordinary, and almost universally ignored. I ignored it, and never bothered to really wonder why such a respected investor felt so strongly that we were due for a depression-like deflation and deleveraging back when companies like AIG, FNM, FRE, LEH, BSC, WM, WCH, CFC were basking in the sunshine of a housing/mortgage reflation (thanks to Greenspan) bull market. That was a costly mistake. And it became the greatest learning experience of my life as an investor.
I went through a trial by fire that forced me to question every thing I thought I knew. I am now a reformed buy and holder, but I am still an avid bargain hunter, buying up unloved companies below book or the cash on their books, and selling when they approach fair value (as near as I can figure). I am no longer afraid to sell, and book profits. I research relentlessly, looking for a reason to sell, not buy a stock. When trades do not work out because the facts have changed, I sell and move on, without regret. If the facts change, I will buy back a stock I just sold. No more ego, no more illusions.
That brings me to point of this blog: Are we in a bull market or not?
I believe we might be. Here is what makes me think this might be something more than a bear market rally:
1) Contrary indicators: there are far too many "other shoe" bears peddling information that more than likely has already been priced in: the "other shoe" may or may not drop, no one really knows, but it won't be a surprise to anyone, except those who get their news from carrier pigeons.
One such bear is the afore-mentioned, Jim Rogers, whose prescient call in 2007, went unnoticed, but who is getting plenty of coverage now. It is important to note that when you make market pronouncements so publicly, they are often recorded for history. When a guy gets it right, the media celebrates him (after the fact), but it is equally noteworthy when he gets it wrong.
Here are some comments by Jim Rogers in the January, 1988 edition of Barrons:
"Most stock markets around the world are going to go up dramatically...but no longer than six months, at which point, we are going to have a real bear market. I am talking about a bear market that is going to wipe out most people in the financial community, most investors around the world. And in fact there are many markets I would short, but which I will not be short, because I think they will probably close them down"
It hard to get much more wrong than that. The chart of the Dow, the S & P, the Nasdaq, show a stock market that virtually went straight up for a decade, with one recession in the early 1990's over the S&L scandal and war fear, and the normal pullbacks and corrections associated with a bull market. If you sold everything, and went into gold, or hid in your underground bunker, you missed one of the greatest bull markets of all time.
2) Reluctant converts: A few noted bears who shorted the market all the way down, have turned bullish, after the huge run-up in stocks, and the remarkable ability of the most doubted rally in recent history's ability to hold up. Most of these converts talk about being bearish long-term, bullish short-term.
3) Fewer sellers: Shelby Davis, the noted investor in insurance companies and financials, who took 50K and turned it into 900M, was early to the bull market that began in 1949, and carried through the entire decade of the 1950's. The Dow, which took 20 years to clear the 1929 high, nearly tripled. One comment he made really struck me: in order to have a bull market, it is not necessary for the public at large to come back into the market and buy; it is only necessary for owners of stock to become reluctant to sell.
This is important because as my good friend and stock-picker extraordinaire, Jim B., observed after the 20 day sell-off in February/March of this year: "This market will have an easier time going up, now that all the fair-weather investors have been shaken out."
4) Shortage of shares/Surplus of Cash: In December of 1988, a mere 11 months after Jim Rogers predicted financial Armageddon, the late Sir John Templeton, was cautiously optimistic as he noted that the average length of bear markets is 14 months, and that it was possible that the bear market that had begun on October 20th, 1987 was over, and that a new bull market had begun. When asked how we would know a bull market had begun, his answer was simple: "higher highs". "When each fluctuation results in a higher high, historians of the stock market will have a hard time saying we were not in a bull market." He further noted that he believed that if were were indeed in a bull market, then it was possible that this new bull market could carry much higher than the previous one since there was a shortage of shares due to all the mergers and leveraged buyouts. (In the 1980's more than 1/6 of all stocks simply ceased to exist as a result of the merger mania dubbed by the pundits: the "decade of greed") And there was a correspondingly large surplus of cash that would eventually be chasing far fewer shares as interest rates were lowered, and the 13% CD became a thing of the past.
You could make a case today that there is a massive shortage of shares in the financial sector as well as construction, home-building, and industrials, where bankruptcies and takeovers have wiped out billions upon billions of shares. The surplus of cash, estimated at 3.8 trillion in money market funds, and treasuries is well documented. When that cash will find a reason to begin chasing better returns, is anyone's guess. All I know is that I want to be invested before that happens, and so I am a reluctant bull.
I harbor the same irrational fear of another cataclysmic sell-off that many investors now have. I have my finger on the sell button constantly on the few down days. Recently I sold off my holdings of Walter Investment Management one day after I bought them because the stock sold off mid-day. That was irrational in the extreme because nothing material had changed in the company, a fact that caused me to buy them all back the following day a full point higher. If Sear's Holdings is worth 80-100 per share book based on historic real estate prices rather than depression-era valuations, should I sell it at 49.00 because the outlook for retail went from bad to hopeful and back again in the space of a week, according to the talking heads on CNBC?
One lesson I learned is that no one can predict the market in the short-term, but long-term, you have to go with the odds. And since the average bull market is five years long, it doesn't pay to be bearish just because everyone else is. One sure way to make money is to buy what no one else wants, and hold it until they fall back in love with it. And invest in sectors that the crowd shuns, until they embrace them once the coast is clear. Sir John Templeton was fond of saying, "If you want to have better performance that the crowd, you must do things differently than the crowd."
I can't say it any better.
I don't know if we are in a bull market, but I am convinced that other than normal corrections and pullbacks, we won't see another panic like this for a very long time. And so on every pull-back, I am buying my favorite investments: Companies like WFC, LUK, SHLD, MET, GE, QSII, BRK-B, AFAM, WAC, USB, GBX, PBR, HNSN & REED. (Disclosure: I own positions in all the companies mentioned above.)
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