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I love coming to the office. Nearly every day, standard tasks are to first review current investment positions online at Bloomberg and then check out the latest news. Then I review the transactions in client portfolios, including cash balances. Next, I review the performance of investments – daily, year to date and long term. Finally, I tackle my e-mail, prepare for appointments, make notes after the appointments and field phone calls while tending to a few more tasks.
I believe that staying informed and on top of the market, and monitoring investment portfolios in relation to market activity, is paramount in any successful investment strategy. In my case, doing so gives me a better grasp of my portfolios, client situations and market changes, which provide added value for both myself and my clients. Being proactive and making informed, rational investment decisions yield positive results and lets our clients maintain the lifestyles they choose. I experience excitement daily when challenging situations arise, because for me they are more like “learning opportunities.”
In retrospect, I can think of only two periods in my last 30 years in the financial business where my daily “ritual” was affected dramatically. The first, which I call the period of “uber-irrational exuberance,” was in the closing months of 1999 and the early months of 2000. Stocks, in particular technology stocks, were on a tear. Amazingly, stock prices of companies with no history of sales, and certainly no profits, were rising daily.
The second period, which I call the “end-of-the-world” period, was from the fall of 2008 through March of 2009, and was characterized by stock prices falling virtually daily. During the end of this period, investors were running for cover by selling stocks and putting the cash proceeds into “safe” U.S. government securities and bank deposits. Investor behavior during these two periods epitomizes the manic extremes of investment hype (uber-irrational exuberance) and investment depression (end of the world) in a very contrary manner. The investor behavior displayed in these two periods needs to be carefully considered by those now making longterm investments in the stock market, because a good understanding of the extremes of investor behavior can lead a wise investor to making significant profits.
During the days of “uber-irrational exuberance,” investors wanted to make investments in stocks regardless of the cost and opportunity for profit. In reality this was not an investment opportunity, it was all hype. Once investors realized that the emperor wasn’t wearing any clothes, the stock market corrected the prices of profitless companies and collapsed very quickly. To say the least, it was a challenge being a fundamental (value) investment manager before the price correction. Value managers were in investment depression, because there truly was little future opportunity in stocks, and buying into highflying, profitless companies was not rational. In many cases, clients of value managers demanded higher returns and left. The Warren Buffetts and John Templetons of the world struggled. In their wisdom they warned investors, but it seems they were ignored.
To the contrary, during the “endof- the-world” period, investors sold assets regardless of their value. Value managers were in investment heaven with the opportunity to buy companies at such low prices. As money left stocks, value managers seized the opportunities. Level-headed investors, like the cash-rich Berkshire Hathaway, took complete advantage of this buying opportunity and invested billions of dollars into preferred shares General Electric and Goldman Sachs with a coupon of 10% and the opportunity to convert into common stock at low historical prices.
In conclusion (and to finally make my point), as value managers we are unhappy when stock prices are uberirrationally high and happy when prices of stocks are low and reflect end-of-the-world pricing. This makes for long days when trying to explain to clients why you are happy, because stock prices are low and unhappy when prices are high. When it’s all about investor behavior, and not profits, the day can get a little tough.
But the good news is that most of the time, stock prices are “normal,” and buyers and sellers meet in a reasonably rational marketplace to exchange ownership of companies for cash, and vice versa. I would argue that the current market environment is a “subnormal” market. Certainly no mania of uber-irrational or end-of-the-world extremes is prevalent in today’s stock prices. However, investor behavior is still dampened by the pain of 2008/2009 losses, and investors have all but forgotten the late 1990s exuberance. The price of stocks reflects a reasonable future opportunity where companies will profit from the increasing rising global standard of living. Therefore, the prices of selective companies are modestly cheap. That is good for us at FIM Group, because we can consistently make investments at reasonable prices, collect dividends and go about our normal day without the interruption of having to manage extreme investor behavior.
