Did you read Barron’s over the weekend? I’ve been reading Barron’s for over 20 years. I read it in 1987 after the Crash. I read it after the 300+ point plunge in 1989. I read it after 9/11 and the 2002-2003 Bear Market. But this week took the cake: Never have I read anything so completely and profoundly negative. Maybe the worst problem is that last week’s news provided more than enough fodder for Steven King economics and Dickensian markets. In any case, negative sentiment seems to be reaching a crescendo. So while it may be too early to call a bottom, we believe nearly-unanimous pessimism is one of the necessary ingredients in the bottoming process.
Is anyone keeping track of everything the new administration said they were doing last week? They set troop withdrawal from Iraq, came up with a mind blowing budget, increased the size of the bank bailout, increased the size of the stimulus plan, announced complete healthcare reform and, surprise…stocks didn’t like it. Stocks held up OK for the first few days of the week, and the November intra-day low of 741 was holding for the S&P 500. Friday’s trading ended the suspense by establishing lower lows. Today, the selling continues.
On my list of considerations this week are healthcare stocks, what’s left of banks, and energy. They sound like categories for Jeopardy. Healthcare stocks began to fall as Obama changed the game. These stocks have been in favor because of positive demographics, strong balance sheets, and operating clarity. The government’s focus and insistent help removes clarity, and that creates a problem which we will study with great dispatch. Banks and financials can’t seem to find bottom. Shoring-up balance sheets looks like the latest black hole. Boat ownership has been described as having a hole in the water into which money is thrown. Boaters may be best suited for bank ownership. Finally, we’ve been blessedly right in our decision to not chase the great energy bubble. The problem is that being right breeds complacency. We will re-test valuations and our theses on Energy shares.
Warren Buffet released his annual letter. BUMMER! Berkshire's fourth quarter earnings were down 96%, driven in part by some "major mistakes" the maestro made in the investment portfolio last year. Mr. Buffet says that this is the worst market environment of his career. He says the economy will be "in shambles" for all of 2009 and likely well beyond. As expected, the media and investors are keenly focused on these negative comments without giving proper consideration to the many encouraging sentiments expressed in Buffet's letter. Buffett says, "Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America's best days lie ahead." Buffett also commented on the 38% drop in the S&P 500 last year: "We enjoy such price declines if we have funds available to increase our positions….Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down."
We have continually expressed our firm belief that investing is a marathon and not a sprint. In this belief, we are in complete agreement with Mr. Buffett. Like Buffett, we buy solid companies and hold them for relatively long periods of time. Also like Buffett, our portfolio holdings have held up much better than the overall market since the market peak in November 2007. Why? Because our companies have been extensively screened for financial strength, management prowess, and industry attractiveness. If we agree that America's best days lie ahead, then we must conclude, as Buffett does, that today's stock prices are an opportunity to own a stake in these great companies. As Buffett says in this letter, "Beware the investment activity that produces applause; the great moves are usually greeted by yawns." We believe many investors are currently receiving much applause for selling shares in great American companies.
I received notes back from many readers last week suggesting I was becoming Pollyannaish. Please read my entire notes; I am anything but Pollyannaish. We can find little evidence supporting an end-of-world scenario, therefore; we suspect that we will make it through this amazingly difficult period. Nothing about this economy nor these markets is easy. Prices may drift lower. Our client accounts are holding-up fairly well. If you share our belief that there will be a tomorrow followed by yet another tomorrow, let us help you with your investments. We can figure this out together.
Hang in there!
Michael K. Farr is President and majority owner of investment management firm Farr, Miller & Washington, LLC in Washington, D.C. Mr. Farr is a Contributor for CNBC television, and he is quoted regularly in the Wall Street Journal, Businessweek, USA Today, and many other publications. He has been in the investment business for over twenty years.