Pessimism With A Hint Of Danger

"... most people say, 'We're not going to try to catch a falling knife; it's too dangerous.' They usually add, 'We're going to wait until the dust settles and the uncertainty is resolved'.

The one thing I'm sure of is that by the time the knife has stopped falling, the dust has settled and the uncertainty has been resolved, there'll be no great bargains left. When buying something has become comfortable again, its price will no longer be so low that it's a great bargain. Thus, a hugely profitable investment that doesn't begin with discomfort is usually an oxymoron."

- Howard Marks (h/t Distressed Debt Investing)

The quote above reminds me of what I have been hearing lately. Everybody is sitting with low equity exposure waiting for the dust to settle in Europe, after which they will pick up great bargains. That is not how markets generally work. It is more likely they will end up chasing markets at higher prices.

I don't want to belittle the problems facing Europe or the rest of the World as they are very serious. While I am talking very bravely, my positioning is not nearly as aggressive as I would like it to be because there is the potential for a disaster. However, more often than not buying at times like the present, when everybody is risk averse, works out well. Even if the disaster scenario plays out, who says we cannot have a rally first. If a non lethal solution to Europe is found we will see a performance chase circa OJ on the Santa Monica freeway.

15 comments:

Onlooker from Troy said...

I thought the same thing when reading Doug Kass' piece yesterday.

Kass: 4 Reasons I'm Still Wary of Stocks

There can be a lot of opportunity cost in waiting for the VIX to go down to more normal levels and for things to "settle down", as so many put it. 

Of course his point about Europe is valid, as you point out as well.  That certainly makes it difficult right now.

Tsachy Mishal said...

Doug Kass' points about the S&P 500 being fairly valued are valid but if investors decide to come back to the market it will get overvalued.

I think the real long term opportunity is probably in Europe. The S&P 500 has not gone down that much. But markets in Europe are trading at single digit P/Es

Tsachy Mishal said...

Ofcourse that doesnt mean there arent individual stocks trading cheaply.

Onlooker from Troy said...

Sure, I agree with that.  As always, valuation isn't a good short term (or even intermediate) basis on which to evaluate the market.

Onlooker from Troy said...

I've been keeping an eye on TOT.  May start to nibble here.

Tsachy Mishal said...

The chairman of Telefonica, which yields 12%, bought call options on 10 million shares. thats a vote of confidence. Either that or hes nuts.

Onlooker from Troy said...

Interesting.  Thanks

frank r said...

Probably a lot of short covering going on today. I'm not so sure about your idea that being below benchmark allocation to stocks is the same as being short. I think there is a different psychology involved. But short interest has definitely been high.

The fast money is definitely on edge. But anecdotally, I'm not seeing that much panic among the small investors. The more risk-averse have dialed back their stock allocations since 2008, and so what they are losing on stocks, they are gaining on bonds. It is going to require a much deeper decline to shake out those who are overestimating their risk-tolerance. So I don't think we've reached a sentiment bottom, nor are valuations screamingly good enough to cause a valuation bottom.

Tsachy Mishal said...

Not for individuals. But for professionals.

ajay desai said...

I been buying TOT, E, TEF, FTE, STD, and VE. So far I invested 2% (8K) in each of these stocks in last couple weeks. Each has fat div and they are close to Mar 2009 low or lower.
 
I have VOD, GSK, Snofi, and BP on whatch list.

ajay desai said...

Typo. Its 12K and not 8K.

Tsachy Mishal said...

Hard to see how you lose in the long run.

Anonymous said...

the question is, has europe entered a bear market.  if so, then the bear market is young.  of course there are big squeezes in bears but they are tradeable lows and not investments..  hard to imagine we are in a new bull.  most optimistic scenario would be a consolidation.. but when do markets consolidate in the intermediary term when nations within the continent are defaulting

Anonymous said...

as a point of reference (i know many are saying it's not the same thing but..) timeline for bear stearns was collapse in march 2008.  we weren't officially declared bear then and we did rally 10% off the lows for 2 months.   however, when threats to a 2nd bank lehman arose summertime, it was a sealed deal.  what is difficult to perceive is how anyone can expect europe to do a better job curbing market slide than the US.  the analog is that the US wasn't doing anything aggressive once it was too late.. Europe is in disarray still and mostly press conference statements & conjecture

Blue Skies said...

[...] 500 has risen since the October lows, when the market was being priced for a repeat of 2008.  In mid-September I shared the following quote from Howard Marks: “… most people say, ‘We’re not going to try to catch a falling knife; [...]