The fears, price volatility and uncertain financial direction of the market place continue to wear on investors. Overhanging the macro landscape is the $700 billion U.S. government rescue package for the American banking system and whether acceptance of this bailout would be sufficient to extricate the financial system from continued uncertainty. Moreover with a string of financial institution insolvencies and near bankruptcies such as Bear Stearns, Lehman Brothers, AIG, Merrill Lynch, etc. investors are primed for the worst.
Negative newspaper headlines along with spreading financial fears and the expectation as who might be next to fail has produced securities trading which has become increasingly volatile, emotional and inconsistent. Amidst the overall investor insecurity, indecision and lack of confidence frenetic stock trading is producing numerous market anomalies and irrationality. In a number of cases investors, due to the perceived ascending risks, are literally throwing the baby out with the bath water. For many investors reading the bleak front-page newspaper headlines or listening to dour TV and radio commentaries on the effusive negativity is overshadowing investment clarity and is producing a “Chicken Little – the sky is falling” investment outlook.
On a micro level, investors faced with extreme emotion are demanding investment liquidity at the expense of intrinsic valuations. In consequence in a rush toward cash the market is experiencing sell-offs/redemptions of hedge funds and equity mutual funds. Unfortunately, as this motivated selling continues it breeds more selling and is exacerbated by investor margin calls. Simplistically, this situation is akin to a dog “chasing his tail.”
As long term value investors we believe, as difficult as it may be, one must be unemotional, consistent and patient. Value will eventually be recognized. However, this is not to belittle the seriousness of the present circumstances. The fact is that worldwide governments, central banks and lending institutions are working 24/7 to cobble an international financial rescue package. This will take time and considerable patience. As a result, securities prices are and will become inconceivably volatile both on the upside and downside. Not unexpectedly we have gone through extraordinary periods like this before such as the September 11, 2001 events, the late 1980s US savings and loan failures, the high tech implosion of 2000/2001 etc. Clearly, these are extremely volatile and emotional times. Investors must be on guard for opportunities. A perfect example is Warren Buffet’s opportunistic purchase of a $5 billion 10% preferred investment in Goldman Sachs and an option on its stock at $115.
Amidst all this uncertainty we were very impressed by a full page Fidelity Investments advertisement in the Wednesday, September 24, 2008 edition of the Globe and Mail newspaper. This excellent ad highlighted Fidelity’s views on the present market environment. It was well-crafted and extremely credible. In this ad Fidelity states:“The extraordinary events of the past week are testing the portfolios and the confidence of investors worldwide…Volatility is part of investing. Markets go up and down. The past five years have seen strong equity market growth but as we’ve seen before with dot-com stocks, the Asian financial crisis and Black Monday, corrections occur. They can be extreme but they are also temporary. It is better to be invested. Markets recover. The stock market had a positive return in nearly 3 out of every 4 years since 1957. And some of the sharpest declines have been followed by the strongest rebounds. Missing out on just a few of the markets best-performing days can mean missing out on significant gains…In the current environment, careful analysis of credit and equity markets, along with prudent portfolio management may be more important than ever…”
In summary we acknowledge that the present frenetic period is most difficult for all investors. Patience is necessary. Our ABC Funds are currently holding over $135 million of short-term cash reserves. We are adhering to our deep-value disciplines and are patiently awaiting investment opportunities.
Thank you,
Irwin A. Michael, CFA
The same commentary is available in audio format from ABC funds web site.
