You really should watch Hilary Kramer: Market has further to fall, but there is opportunity in KDN, CBI, ACH to get some market perspective. The video was posted on August 21, 2007 and she makes some very good stock recommendations. Over the past 18 months that I have been looking at her picks versus those of James Cramer, I have found that you would have done better with Hilary.
While giving her full credit for her stock picking and market coverage I find I must strongly disagree with a statement she made. Cautioning viewers that " There is going to be a meltdown" is not overly alarming, but I take great exception to her stating that "This market can go down 25%." She shared her fear that there are 9000 hedge funds and that 3000 might close down.
It is possible that people may panic in certain circumstances and the market can stray into irrational short-term behavior once again, but I find her reasoning a little soft. Let's assume that the 9000 hedge funds own 50% of the total equity in the stock market (they don't) and one third go out of business, that would equate to a 15% collapse of value (unscientific, I know, but there is some correlation).
From my perspective I see a somewhat different reality. If 9000 hedge funds were 100% leveraged, then they might all be in trouble, but what would it take to make things right? Perhaps reducing the leverage from 100% to 90%. In other words, if all the subprime loans, on average, were covered by 10% equity, as they should have been, then there might be no problem whatsoever.
I don't believe that it makes sense to assume that one third, or 3000, funds will collapse. It is more logical that something closer to 10% might collapse, reducing the overall market leverage to a more realistic position. In addition, there will be a lot of funds that do not collapse, but close due to poor performance and investors seeking other opportunities. If we see a 25% market drop, it will not be based on values, but fear. Such statements from Kramer and other pundits serve to fuel the fear.
Kramer also said to stay away from the financial sector, something most analysts and reporters have been saying. Not me. I think selective stock picking, even within the financial sector, is warranted and the only way to make above market returns as I've outlined in Buy on fear today? Bear Stearns (BSC), Countrywide (CFC), IndyMac (IMB), Popular (BPOP), Washington Mutual (WM).
I am not suggesting jumping in with both feet. I am suggesting that whatever fair value is, it must be more than a market tainted by fear. Although coming from a growth side perspective instead of my value side, Georges Yared weighed in on the subject as well when he posted three relevant stories: Is FUD threatening your portfolio?, Volatile Markets: Bank of America (BAC) offers low risk, high reward and Bank of America (BAC), US Bancorp (USB), and Wells Fargo (WFC) can rise above the fray.
In no way am I advising anyone to throw caution out the window. I just want less fear mongering, less hype, and more intelligent investing conversations. Anyone interested in sharing their experiences is encouraged to comment.
To verify my track record, including bad calls, read Chasing Value and Serious Money. Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm.
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Reader Comments (Page 1 of 1)
8-24-2007 @ 7:34PM
Michio Takahashi said...
First: I think Cramer is an arrogant egotistical showman who commands far too much attention and weight. He makes a "pro" statement, and "con" statement; so he is bound to be right 50% of the time.
Second: I am retired, living on a nice pension plus social security, and have been investing since 1969. I have seen ups and downs, and found that going against "conventional wisdom" has been very profitable. I find that the "experts" and the "big money boys" are frequently the worst investors and go on fear and then over enthusiasm. I went counter to them in October, 1987, buying Disney, Pepsi and Coke, WFC among others and made out handsomely. *** My modest portfolio (mostly Dodge & Cox Stock Fund,energy stocks (XOM, CVX, MRO, OXY), a sprinkling of others (Costco, AT&T, RYN), and in the past several years, The financials (ALD, C, BAC, WFC, and WM).
Keeping this "relavant" to the blog entry. The 25% collapse has already occurred in the financial sector. I wish I was not fully invested right now, or I might be jumping in, although not so confident to buy on margin. In my younger days, I would be especially tempted. I am hoping that the high dividends will support those financial stocks i hold. I would be worried if the dividends were decreased or elliminated, but even then, I don't think any of those companies will "go under" and I (or my "children" and grandchild) will prosper with them in the long run.
*** Refers to: in October of 1987, my brokerage firm was Gruntal, and Elaine Garzarella (spelling?) was with that firm. I had just bought HWP, and my broker said Elaine was selling HWP short. A few months later, when HWP rose nicely, I could not but help in asking my broker how Elaine was doing -- she had long since sold her short position.
I have never made any comments to any of the blogs here; if you read this, I hope you will forgive my rambling.
8-25-2007 @ 5:23PM
Alan Salisbury said...
Excellent post,Michio. It is refreshing to read your comments!
8-26-2007 @ 2:24AM
Sheldon L said...
Mishio,
Some good ideas. You are referring to James Cramer in first paragraph though, and this quote is from Hilary Kramer.