Lessons from Benjamin Graham and Warren Buffet in today’s Bear Market
October 23rd, 2008 by ALVIN SOONG
Like some other market writers, I feel the heavy hand of history resting on me as I report on the calamitous events tossed up by the year-old global financial crisis.
It is clear that we are living through a period that will certainly be described as the second great stock market crash in history. The first great crash occurred nearly 80 years ago, with the calamitous collapse of Wall Street in 1929.
This appalling financial carnage may make us too scared to spot any buying opportunities thrown up by the big plunge in stock prices. The late investment guru Benjamin Graham, who survived the 1929 crash unscathed, suggested a way to profitably invest under such depressed market conditions.
Rather than try to time the market, he advised investors to look exactly at what a company is worth and how much it would be worth if worst should come to the worst. If the company is so cheap that its value stays almost the same even if it were to go out of business, then you have a ‘margin of safety’ in your investment, he said.
For Warren Buffet, he has now been buying into equities. He has a simple rule to share:Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.
To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records five, 10 and 20 years from now.
Warren Buffet said he can’t predict the short-term movements of the stock market. He haven’t the faintest idea as to whether stocks will be higher or lower a month - or a year - from now.
A little history here: During the Depression, the Dow hit its low, 41, on July 8, 1932. Economic conditions, though, kept deteriorating until Franklin D. Roosevelt took office in March 1933. By that time, the market had already advanced 30 per cent.
Or think back to the early days of World War II, when things were going badly for the US in Europe and the Pacific. The market hit bottom in April 1942, well before Allied fortunes turned. Again, in the early 1980s, the time to buy stocks was when inflation raged and the economy was in the tank.
In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.
Over the long term, the stock market news will be good. In the 20th century, the US endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when headlines made them queasy.
Today, people who hold cash equivalents feel comfortable. They shouldn’t. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value.
Indeed, the policies that the government will follow in its efforts to alleviate the current crisis will probably prove inflationary and therefore accelerate declines in the real value of cash accounts. Equities will almost certainly outperform cash over the next decade, probably by a substantial degree. Those investors who cling now to cash are betting they can efficiently time their move away from it later.
In waiting for the comfort of good news, they are ignoring Wayne Gretzky’s advice: ‘I skate to where the pack is going to be, not to where it has been.’
Summarised from Straits Times and CNBC news
