Tuesday, June 27, 2006

Difficult Markets-The Rubble of Neglect

Roy R. Neuberger, the eponym of Neuberger Berman, an investment management firm now owned by Lehman has (he is 102) a great love of painting which he financed through his successful investment career. He was especially adept at short-selling, which brought him great fortune through the Great Crash of 1929 and well into the Depression.

A famous quote about the stock market that comes to mind in difficult markets is attributed to Neuberger,"Analysts...in bull markets, who needs them...in bear markets, they'll kill you!"

Hans Deuel of the blog Clearfish Research describes the phenomenon well in "No Matter What You Do, You're Wrong."

  • You buy on the way down, and it keeps going down (should have waited), or
  • You sell on the way up and it keeps going up (should have waited), or
  • You buy on the way up and it keeps going up (you should have bought earlier), or
  • You sell on the way down to stop losses and it turns around, or
  • You don't buy at all (opportunity loss), or
  • You don't sell at all and hold those losses, or...
As he points out, you can't beat yourself up. This is not a game of perfect. You have to quit beating yourself up in these choppy markets, keep the right investment horizon in mind, and don't expect that you will pick bottoms or tops.

I can recall Buffett describing his purchase of a large position in General Dynamics. At the annual meeting, he was asked about how much time he had spent in the analysis of GD's large submarine division . He replied about half an hour.

Sometimes, the obvious should not be an impediment. Mr. Market may agree over the short term or otherwise. Focus on decisions that favor your long term horizon. If Mr. Market continues his despondency, you can buy more of a good thing.

The beauty of markets like we are experiencing, and this is a good thing, is that we get the opportunity to buy businesses at prices much better than we could have expected. The high flying commodities are not a place where you want to be in my view...periods following gold rushes are not a lot of fun.

A friend of mine put it best, "In today's market, people are buying things they should have owned five years ago, but wouldn't touch."

Isn't that almost always true? Twenty years ago, the investment firm DLJ sponsored their last coal conference after only 18 people attended, 16 representatives of presenting companies, a buddy and myself. Coal went nowhere for some years until some shrewd investors discovered the mineral was cheaper on Wall Street than in Appalachia. At energy or mining conferences today, it is SRO...little firms such as mine can't possibly get in.

Not that we'd want to! I think similar thinking should be applied to your investments. Unpopular, boring, seemingly out of step ideas might turn into real jewels with a bit of time. No one cares in the capital markets. But is there still a business underneath the rubble of investor neglect?


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