<<I've heard you give this argument before. It
was last year at Dow 7500. Why is it valid any more now
than it was then?>>
I probably did argue bearishly before. But don't believe anybody's bearish argument if it does not also say they are selling significant portions of their portfolio. This time I'm putting my money where my mouth is, meaning I see something new here. I tried to explain it, but so much of it is gut.
But, as you ask, why is my argument any more valid now than it was at Dow 7500? Thats a question that answers itself. The market is up 20% since then! That is at least two "normal" years of gains by historical standards within less than one year. And it was hardly a cheap market last year. I considered the market P/E then extended, and it was about 20 or 21. Now its 26 or 27. And that was before Asia collapsed. Asia was the "growth story" at so many companies which now brag about how only 5% of their business is in Asia. (I refer to Caterpillar, United Airlines or just about any consumer products company - yes Mike, Nike too)
I'm not asking you to sell your portfolio just because I am selling mine. I am not selling the stocks I have with big long term gains - yet - because I don't want to pay taxes. But they're next. I had one of them jump 10% today. Its probably gone tomorrow. But if I owned Coca Cola at 10 would I sell it? Probably not. All I'm doing is presenting an argument. This is not fear - this is coldly rational. Which is why I will sleep very well even if the market goes 50% higher. We are in a mania right now. My suggested reading list would be the first chapter of Contrarian Investing or the first three chapters of Popular Delusions and the Madness of Crowds (or whatever the title is - its a 19th century work by a writer named MacKay. Should be on every value investor's bookshelf so we can keep our heads in times like these). You can never pick the top of a mania, and you are a fool to try. The key is recognizing that there is a mania and getting out so you can watch rationally from the sidelines. Is this a well accepted argument? Of course not. A correct contrarian argument, by definition, never is. (Though neither is an incorrect contrarian argument, like "buy Japan" in 1991.)
And that brings me to your next question. Why would I put that money into Asia? Asia looks absolutely awful. I agree with just about everything you said. But that is exactly when you want to invest. Do you realize that there are many profitable companies in Japan and Asia trading at less than the value of the cash on their balance sheets? With a sophisticated institutional screen, it would take you about five minutes to find a profitable net-net in Japan. This is the second largest consumer economy, and arguably the best educated, in the world. Like I said before, this trade may look very very stupid in six months, but that is not my time horizon.
Respectfully,
Jim |
