by Neil Berlant
The heart of the argument is the stock market is clearly driven by either fear or greed, and history shows fortunes are made during times of economic distress or financial corrections.
Every time we've experienced major market declines, e.g., 2001 and 1987, people said this time it's different and we'll never return to the prior highs. As we now know, not only did we return to robust markets, but we sharply surpassed prior highs. Certainly while we were experiencing those periods — and I lived through both and several others before them — it truly looked like the doomsayers were right. Most pundits cautioned then that those who hesitated to sell would be punished unmercifully. I suggest it isn't too terribly different today, although it probably feels like it's worse now. It always feels like today is different than before. Indeed, some things are different today in that stock markets, or rather investors, have disconnected the value of the businesses with prices of the stocks.
What we've seen in the stock market over the past several weeks has very little to do with the enterprise values of the businesses, or even their prospects, but instead reflects the excesses of leverage (margin), margin calls, and preponderance of speculation present in the market for a very long time. Among the biggest culprits in this massive global sell-off are the hundreds of hedge funds using leverage, of as much as 10-20 times, and which cannot tolerate a sell-off. As prices decline, they're forced to sell, which only exacerbates the problem. Along with forced margin calls and you have the makings of this massive sell-off. In other words, very little of recent market action has to do with the operations and successes of the companies represented by the shares of stock changing hands on the stock markets. Much of it can be attributed to the combination of fear and margin calls.
A better quote to use to address the current state of the markets is, "It was the best of times, it was the worst of times." While Dickens was certainly not referring to the stock market, it does feel like the worst of times. Our nation is at war, the economy is slowing, we were just weeks away from a national election, and the stock market was plunging. You might ask, what about that makes it the "best of times?" Well, from my perspective as an investor focused on owning businesses not stocks and investing for the long-term, the opportunity to purchase shares of outstanding companies at significant discounts from recent levels is simply too enticing to resist. The dynamics of the water industry, which is of course the focus of all of my attention, haven't changed or even deteriorated during this market meltdown. In fact, nearly every day, the prospects seem to improve. So, what this all means is we're being presented with an unusually attractive opportunity to purchase shares of outstanding companies when they're on sale. I'm not denying it takes much courage to proceed when all others are fleeing, but more than two decades of specializing in the water industry and four decades of experience in the securities markets as an analyst, portfolio manager, researcher, and money manager, all reaffirm the merit of investing in this particular time of turmoil.
Be assured, I'm not cavalierly dismissing the pain connected to investment positions that are declining. Nor am I ignoring news of the time — it would be hard to do that. On the other hand, I am paying close attention to continuing success and prospects of the businesses we own and this industry we specialize in. Their prospects, in my view, are the best they've been since I began my focus here in the mid-1980s. I have no doubt before long we'll look back at this period and see what a unique time and opportunity this was. While we're in it, though, it does take a great deal of confidence to stick with what we have and add more. Again, it takes confidence, not courage. I'm quite certain about our prospects, market conditions notwithstanding, and continue to add to positions and stay the course. As always, I welcome your questions, comments, and occasional smiles.
About the Author: Neil D. Berlant, a Los Angeles-based securities analyst with a lengthy history covering investment strategies in the water industry, is portfolio manager for the PFW Water Mutual Fund. Contact: 800-227-0319,
[email protected] or www.profitingfromwater.com
