Monday, December 1, 2008

Wherein I Achieve Peace With The Market

"All financial crises end-- and when they end, they end in ways that create spectacular opportunity" Lawrence Summers

hard to explain.

The Dow was down 680 points today.

Over the past three months, when the market got hit hard like this, I'd get depressed. Didn't want to look at my account value online-- just didn't want to know. I lost a lot of money in the market this year.

But today is very different. I'm actually glad for the selloff. In fact, I hope that the market has a similar decline tomorrow, and the next day. Why? Because the market is presenting me with a spectacular opportunity.

Why now? Why is this better than previous declines? Why couldn't I have said the same thing 2000 Dow points ago? Answer: gut feeling.

I could give a more elegant answer. I could talk about my zero boundary theory (the lower it goes, the closer it is to the bottom) I could refer you to the John Hussman (by way of Henry Blodget) web post which argues that the more the market drops, the more attractive it becomes for long-term investors.

But in the end, big stock market returns are made when everyone else is consumed by panic. We all know this ("Buy when there's blood in the streets") but it's incredibly hard to do. It's not just when the dumb money sells. They may have sold long ago, or maybe they'll never sell. Bottoms are made when us smart guys-- the "smart money"-- just can't stand it any more. We buy with both hands down 20%, and we puke down 40% ("this is a disaster-- get me out").

My gut is telling me that we're at the inflection point. That doesn't mean that today was the bottom. But it means that we're not going much lower. Into the 7's on the Dow? Maybe. Probably. But not into the 6s. So how's my gut's historical performance? Pretty good. I'm not exaggerating when I say that I feel very strongly about this: right now, today, right here. No guarantees, but it's a feeling that I don't get very often and that I've learned to trust.

I'm not predicting a near-term rally. Maybe yes, maybe no. What I'm feeling is that investments today in high quality stocks will produce substantial returns-- doubles or triples-- in the next two or three years. This is a once in a generation opportunity to acquire stakes in truly world class corporations at deeply discounted prices. They may well get cheaper, maybe much cheaper, in the next year or so. But in 2011, you'll marvel at the fact that you could have bought these stocks at those prices in December 2008.

So what to buy? It's easy. Buy the blue chips. Buy the companies that are the clear worldwide industry leaders. The ones that have the impregnable balance sheets and the multi-decade records of outsized returns to shareholders. It's truly like shooting fish in a barrel. Forget about relative performance. There will certainly be others that outperform. But names like Intel, Boeing, Microsoft, Caterpillar, Coca-Cola, Cisco, and Pfizer (among others) will give you solid double-digit returns or better plus a good dividend over the next few years. They are franchise companies that are rarely available at today's valuations.

What not to buy? Themes. Tips. ETFs. Anything that represents a guess as to the next market tick. Top down ideas like infrastructure or global decoupling. Anything dependent on interest rates, or commodity prices, or the Baltic Dry Index. Don't buy sum-of-the-parts stories, or discounts to NAV. Don't buy it if you have to look up the symbol, or if you can't immediately describe exactly what business they're in. There are just too many exceptional and truly inexpensive companies with virtually zero risk of accounting fraud, or adverse patent rulings, or competitive threats.

And yes, I know that we're in the worst recession of our lifetime. I know that housing prices haven't bottomed. I know that the payroll employment number on Friday will be a well below pessimistic expectations,that the unemployment rate is going to 10%, and that retail sales this Christmas season will be the worst since the Stone Age.

Bottom line: The market's not going much lower. It may take a while to recover--maybe a long while. But you can become an owner in some unbelievably great companies at incredibly good valuations right now. And they have dividends that compensate you very well while you wait.

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