“Be fearful when others are greedy and greedy only when others are fearful.” - Warren Buffett
If you are reading this right now, I’m as sure as I can be about anything that you are aware of the huge sell-off that took place across the global equity markets today. As the story goes, it all started with worries in the Chinese stock market that spread to Europe, which then went to America and (coupled with a few pessimistic economic reports) prompted the biggest decline since the market opened following September 11, 2001.
Any day where decliners outnumber advancers by 9-1, much less one coupled with nearly every single index deeply in the red, is going to raise questions among market followers about the cause of such a decline. There are going to be many different explanations depending on your view — technical, fundamental, etc. Certainly there has been a sustained rally without any pullbacks, and multiple expansion in the face of an economic slowdown is a concern, but my philosophy about the day-to-day movement is that the market does what the market does. Over the short-term, people are primarily motivated by:
1. Fear
2. Greed
Recently, people have been getting greedy in the markets. This manifests itself in people taking on outsized risk — more than they have any reason to assume. I see Google (GOOG) at $500; that is speculative greed. I see Garmin (GRMN) at $57; that is speculative greed. I see Apple (AAPL) at $90; that is speculative greed. I realize I’m singling out technology, but that is where this mini-bubble has primarily formed. From where I sit, it is almost if not totally impossible to consider those companies, and many others, capable of generating discounted cash flows in excess of their enterprise values. You might say I’m being a militant value investor, but if you don’t think the stocks you are in are actually worth more than you bought them for, you are speculating that some “greater fool” will come along any pay you an even more inflated price for your shares. Now, I’m not saying you can’t make money in stocks like GOOG or GRMN or AAPL — many people have ridden those companies’ successes to big gains. What I am saying is that if you think you can indiscriminately buy those stocks and make money, or keep/kept putting off selling because “they were only going up”, you were being greedy. Following greedy people is foolish.
As I write this, Mad Money with Jim Cramer is on in the background. I am far from a huge Cramer fan, but I watch the show enough to know how it goes. Today, almost every caller is despondent — the “booyahs” and enthusiastic shouts are gone, and people are worried about the future direction of the economy and market. Right now, people are scared. They are fearful. When greed rapidly changes to fear, we get the big down days in the market like we saw today. Prices drop, television personalities worry, risk managers and analysts ask if Armageddon is approaching. I’m not going to celebrate if the economy really is slower than general projections, as I think it will be, but I will celebrate if this fear which is now pervading the markets results in excessive selling of things which I liked at the pre-fear price. Prices fluctuate. This doesn’t mean the fundamentals have significantly shifted. If emotions get the best of people right now, as I think they are and will for the next several days, start to get a little greedy. Markets move between these emotions naturally, and if you get “greedy” by investing in excellent companies at a suddenly excellent price, there is nothing wrong with that. In particular, pay attention to the foreign markets. The foreign markets of places like South Korea, Taiwan, Brazil and India are where the greatest growth stories will occur in the coming decades. I believe many stocks in those markets are cheap, and they are going to get even more cheap as capital flees for high-quality American companies. Yes, that means I think the Dow Jones Industrials (ETF is DIA) will hold up the best in the face of any selling, and they will do the best shortly after buying interest returns. Going back to earlier in the article, much of the greed and speculation in the markets took place in technology. I think the Nasdaq will be the hardest hit by any more selling, and I think buyers will be slower to return to those stocks.
Everyone wants to take dramatic action right now to cut losses and position themselves to profit in case of a turnaround. To me, that means don’t get discouraged — start bargain hunting! Keep an eye out for further selling that could present an opportunity. Look abroad at the fear present in those markets; if you don’t have foreign exposure, consider adding some soon. The laws of valuation haven’t changed, and no cataclysmic occurrence has altered world events. My feeling is that companies that were functionally fine before today are still fine right now. And, if this sell-off continues to an extreme, it could finally present the opportunity to buy large-cap growth stocks at huge discounts to intrinsic value, and could mark the start of growth closing the return gap that has existed in past years against value.
Be sure to check back for updates this week, as the one good thing about this is the numerous ideas it gives me to write about.
