We're all going to die

Philip Vanstraceele 09 Aug 2011

Benjamin Franklin first stated that the only two certainties in life are death and taxes. Investors have become so gloomy that their expectation are low.

"We are going to hell ! ", "The stock market crashes", "Experts are expecting a double-dip recession": this is the kind of stuff that we have read and heard the last few days, on television and in the newspapers. "Growth is too slow for easy deleveraging, politicians are at loggerheads, and global imbalances have hardly diminished. If central banks respond with more newly-minted money, they could make markets more volatile and the next crisis all the more exciting.

The Swiss and Japanese central banks both moved to halt the appreciation of their currencies, which have been competing with gold for the role of investor's favored haven. Prominent investors such as John Paulson and David Einhorn of Greenlight Capital have bought gold as a straight bet that central banks and governments would fail the value of paper as fiat currencies. But at some point, there will be a time when things will go better. It always does! None of this means that the much-feared crisis will not arrive, sooner or later.

Of course, it is impossible to time the market, and things can worsen. But remember what Benjamin Graham said:

"Individuals who cannot master their emotions are ill-suited to profit from the investment process."

The strain on the exchanges amid the high volatility has underlined the extent to which the market is dominated by electronic trading, particularly the use of sophisticated computer algorithms that either react to new data or are programmed to try to anticipate it. That causes sudden, sharp movements in prices.

These algorithms are no tranquilizers for Mr. Market's moods. Warren Buffet once said:

"Be fearful when others are greedy, and be greedy when others are fearful. You can't do well in investing unless you think independently. And the truth is, you are neither right nor wrong because people agree with you. You are right because your facts and reasoning are right."

At MFIE Capital we like to keep things simple: we only make a few trades a month: two buys and two sells. We invest systematically, and Mr. Market offers us deals through our valueScreeners tool. Today stock picking is crucial to obtain a decent result. In the last ten years, the global stock market did not go up, and it will probably not move up during the next ten years. The market went up too much during the 1980s and 1990s (due to unrealistic rates of return assumptions), and it will need to adjust itself to reality, but that will take some time. Vitaliy Katsenelson defines this as a sideways market.

The market is a cowardly lion—it displays occasional bursts of bravado but is ultimately overcome by fear.

The good news is that there are bright spots. The right stocks will rule in sideways markets. In bull markets, all stocks dominate bonds. During sideways markets, most stocks don't dominate fixed income instruments; only the right stocks do. One must use a disciplined buy-and-sell strategy to make money in this low-return environment. So you need to hope for the best and prepare for the worst. Interesting these days is to look to the deep value stocks like Graham 'Net Nets' and negative enterprise value companies. Mr. Market is offering these with a huge margin of safety.