Update on Yesterday's Massive Market Moves

Dear Whiskey reader,

In the fictional world of Douglas Adams’ best-selling series, there is a book called The Hitchhiker’s Guide to the Galaxy. In Adams’ words, it is the “standard repository of all knowledge and wisdom.” On its cover there are only two words: Don’t Panic.

You probably know by now that the market had its worst day yesterday since 9/11. It was a widespread sell-off hitting all markets and all sectors. Down here in Argentina, the Merval Index lost 7.5% of its value in one day. Other South American markets also felt the pinch. Brazil was down 6.6%, and even Chile fell nearly 5%.

So why did it happen? You’ll hear lots of reasons why. Among them: Fears of a crackdown on speculation by Chinese officials (China’s markets hit record highs before yesterday’s debacle) and a large drop in durable goods orders in the U.S. (stoking fears of a slowdown in the U.S. economy). These seemed to be the big ones. It’s as if people are scared that the two big giants who pull the sleigh of world trade are about ready to take a break.

I’m writing this e-mail to calm your nerves. In essence: Don’t panic.

The Capital & Crisis recommended list is pretty tight. We’ve got only 16 names. Most of these are already well above my buy-up-to prices. In a way, we’ve been preparing for a day like this for a long time, because we buy only extremely well-financed businesses. We know they are not going to disappear overnight. We know the real value embedded in our shares, often backed by loads of tangible assets. And many of our investments are beneficiaries of long-term trends — infrastructure, energy, water and more. Many have great management teams and businesses with proven track records over many cycles. It is not as if we were out speculating on breezy stocks with great stories and no businesses.

Therefore, on days like this, we should not worry too much about seemingly big moves in share prices. (A little worry is a good thing; it’s a survival mechanism and prevents you from doing really stupid things. Makes me think of Starbuck in Moby Dick when he says he will have no man on his boat who is not afraid of a whale.)

Also, I can assure you that while many theories will be offered as to why the market dropped so severely, no one really knows exactly what triggers daily moves like yesterday’s. It’s like trying to figure out what grain of sand finally caused the sand pile to topple. There is just too much going on for anyone to know for sure. After all, how much has really changed today versus yesterday?

Look at it this way: The stock market has basically been moving steadily up since July. The S&P 500, for example, rose from about 1,250 in July to about 1,450 this month. Even after this sell-off, it is still at about 1,400. So basically, even after today, it’s been worth being in the market during this time. And you’ve done much better than the market with many of the stocks I’ve recommended.

Is it the beginning of a long slide? No one knows. Unlike others, I’m willing to admit that I don’t know. If you are going to succeed in markets, you just have to realize that some things are unknowable. Some questions have no definitive answers, only guesses.

I’ll keep looking for great opportunities — good upside with little downside — just as I’ve always done. There is always someplace to invest. There is always opportunity somewhere.

Even in 2000, at the height of the last bubble, some well-chosen bets on energy, homebuilders, REITS and gold stocks could have made you a fortune — even as the broader market went nowhere to down over the ensuing five years or so.

Conversely, if you’ve been in newspapers, auto parts suppliers or large-cap U.S. stocks over the past two or three years, odds are your investments have not done much of anything even though the overall market is up solidly.

So diligence and discipline and selectivity are keys. As I’ve said before, we don’t invest in the market. We invest in specific opportunities in the market. Not the produce section, but specific avocados, onions and melons.

As always, I’ll be keeping an eye on our investments (“Two eyes, as often as I can spare them,” as old Gandalf said in The Lord of the Rings). As things change, I’ll report back and we’ll make adjustments as needed. For right now: Don’t panic.

Chris Mayer

February 28, 2007

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