Value investing and the pre-depression circumstances at the present time
The article below is a guest contribution by Paul Sandison*.
Investment Postcards of the December 17, 2011 directs the reader to this week’s WealthTrack programme, in which Consuelo Mack interviews two value investors, Chris Davis of the Davis Funds, and David Winters of the Wintergreen Fund.
I give the pair 5 stars ***** for their account of value investing, which in normal times is a valid and beproven way to go if one is not a day trader.
However I give 3 stars *** only for the response to the questions of what to do in a depression and how to protect against high frequency trading. In this article I will only deal with the circumstances around the vexing question of how to protect one’s investments in a depression.
In the last depression the Dow Jones index sank to 8% of its 1929 highs. It took 26 years from 1929 to 1955 for the Dow to reach the same level as the peak of 1929. Which small private investor, especially a person investing for retirement, has that time horizon? Private people invest not only for dividends but also for growth. Which firms maintain high dividends during a depression? Also, many firms collapse in a depression which often means the shareholders lose everything. Lastly, in this present pre-depression time, should a responsible investor not keep a considerable amount of cash for investing at the bottom of the crash?
Of course some may counter with the argument things are different now – that 50 years ago 90% of the stock market shareholders were private citizens whereas today 90% of the shareholders are institutions. There may well be differences between the behaviour of individuals versus institutions during a burgeoning depression but it would be interesting to know what those differences might be. Even if an institutional investor does not have any skin in the game he or she is bound to be gripped by amazement and shock when the market drops vertically and not too seldom “adjust the portfolio” and sell. For why else do we have the spectacular falls of 2001, 2008 and even the lesser drop of the fall of 2011? I submit that fear takes over. For all the Fibonacci tools at his disposal, would an institutional pension funds manager really think ‘Oh, this is such a huge drop, this cannot carry on, the market must bounce right back up’?
Consuelo Mack put very cogent questions to the pair without receiving, in my opinion, adequate answers. Her questions are at once both current and valid. At this fraught time they should be one of a number of relevant intensive and sustained topics among economists and investors. The result of her interview, while quick and interesting, is therefore only a starting shot. Far more needs to be discussed and explicated.
When I first started writing in Investment Postcards about 3 years ago, the danger then was a US banking sector teetering on the brink of collapse, and a deflationary spiral in the US including some Central and Eastern European countries. The interventions by the US Federal Reserve, including two massive bouts of Quantitive Easing (in essence, money printing) has changed the economic and stock market landscape not only in the US but around the world. By propping up the US banks the US deflationary cycle has been delayed, but at a huge cost to the taxpayers and without addressing the underlying lack of production and employment in the economy.
Click here for the full article.
Source: Paul Sandison, December 20, 2011.
* Paul Sandison, 64, is a social critic of contemporary society. Although born in South Africa, he has lived in Europe for nearly 40 years. His forebears include an ancient ancestor to King Niall of Ireland and Charlemagne. Paul is currently promoting American and European arrangements of contemporary Irish music. His hobbies are reading, development economics and jogging.
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