It’s hard to believe autumn’s days are here already. As the poet Charles Bukowski wrote, “The days run away like wild horses over the hills.” The leaves are already turning. The air is getting cooler. The sunsets come earlier. The fall seasonal brews have been tapped.
I love the changing of the seasons, and it always puts me in a thoughtful mood. I guess because it makes me more conscious of the passage of time, something you can lose in the day-to-day tending to a life.
Such thinking also tends to force some perspective. I think the world is full of opportunity. I think it is a great time to be an investor. Of course, with the constant onslaught of depressing news out there, it’s not always easy to remain alert to these opportunities.
Recently I received an email from a reader of my Capital & Crisis newsletter. I thought the email echoed pretty well some of the concerns investors have right now, so I’d like to take the opportunity to address a few of those points today.
“If the bank stocks run into trouble and there is less liquidity in the market, will that not impact on business in general? Will it not affect businesses that are otherwise well run and in good shape? Will it not bring about a contraction overall?”
The short answers are yes, yes and yes. But those things are hard to predict. In fact, I would say they are impossible to predict reliably and make money. If what I’m saying weren’t true, then a lot more economists would be richer investors. Yet the greatest investors — Graham, Buffett, Klarman, Greenblatt, Whitman, Lynch and many others — are not economists. Not only that, but they pretty much ignored economic forecasting altogether.
In my experience, there is little point in going through life thinking every year is going to be 1929. As an investor, you have to invest through good times and bad. I gave you my personal example, in which I’ve managed my own money through two periods when the market was cut in half from peak to trough (2000-2002 and 2007-2009) yet each time my account rose in value far more than it fell going in. The same was true in Capital & Crisis in the latter crash. (It wasn’t around for the first one.) I think this 2011 episode will bring the same result.
“Now, I know that you believe in finding businesses for which all the fundamentals are good, but surely these too will be negatively impacted if the above scenario is correct. You quoted Buffett as to the fear factor — ‘Be fearful when others are greedy and greedy when others are fearful’ — but is it not still early days? Do you not think that the fear factor will rise still more if the above scenario comes to pass?”
We don’t know if these are the early days. Things could get worse or they could get better. I come at these things with wide historical perspective. I can show you how every decade there are people who think it is end of days. Yet each time, humanity figures out a way to move forward and markets recover. Then the market cycle repeats, endlessly, through the years.
What’s interesting in our times is that we’ve had several crises packed closely together. And things seem to unfold at hyper speed. But otherwise, I am of the opinion that what we are suffering from is just another turn of the market wheel in a long history of such turns.
Humanity has done an awful lot of self-defeating things. Yet somehow, here we are. Despite all that the 20th century threw at it, the stock market still produced many sparkling gems, a long list of iconic franchises — Wal-Mart, Microsoft, McDonald’s, Home Depot, Apple and many more. I think the 21st century will be no different. We’ll have many calamities, but we’ll also create many opportunities.
I believe in people and incentives and the idea that the true economics of a business will prove out over time. I believe in the classic principles of investing for the long haul that have served so many so well. I believe in patience and discipline.
“So, I guess that really I would like to know if you think that we are on the cusp of a crisis or just a temporary slowdown.”
I’ll give you the only possible honest answer: I don’t know. But here is what few others will tell you: You don’t have to know the answer to that question to succeed as an investor. George Soros, the billionaire speculator, once said, “My financial success stands in stark contrast with my ability to forecast events.” And Warren Buffett said, “Forecasts may tell you the a great deal about the forecaster, but nothing about the future.”
It’s something of a myth that great investors are great forecasters. They aren’t — and they realize they aren’t. They play the odds, buying cheap stocks in good businesses, backing talented people and sticking with their winning investment philosophies even when (and especially when) times got tough.
I wouldn’t invest unless you are in it for the long haul, unless you can hold onto a name for a few years. Don’t bother buying stocks if you are not committed as an owner. Think of stocks like real estate. You don’t go around willy-nilly buying real estate. Why? Because you know it is not easy to sell. It’s a hassle. So you are careful about what you buy.
This is why, getting back to the reader’s initial concern, the much-ballyhooed benefit of “liquidity” — the ability to buy and sell with ease without impacting the price of the asset — is the most overblown idea on the planet as far as finance goes. In 1960, the stock market turned over about 14% of its names. Meaning, people held stocks for, on average, seven years. Nobody complained about liquidity. Today, the whole market turns over in less than eight months. There are few owners anymore.
In the end, there will always be people telling you what can’t be done. I’ve heard this chorus since I started writing Capital & Crisis for the public in 2004. But I feel oddly optimistic. I feel like now is one of those times — like the pit of 2008 and early 2009 — at which we’ll look back and be glad we stayed in the game.
Of course, only time will tell. Until then, don’t forget to enjoy the present — the tasty fall brews, the company of friends and family and “the teeming autumn, big with rich increase” — as the old Bard had it.