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Our Misguided Love Of Prices

Our Misguided Love Of Prices

We live in a society that likes to measure and classify. It’s a way to make sense of things and gives us a sense of control.

We learn to measure early in life as schools introduce us to grades. A-students are smarter than B-students who are smarter than C-students and so on.

For some it provides a feeling of self-worth. My kid is smarter than your kid so I’m a better parent than you. My house is bigger than your house so I’m more successful than you.

These are common beliefs but are they necessarily true?

The intellectual in us says, “Well of course they aren’t. Don’t be silly.” Yet if we’re honest with ourselves we’ve believed them from time to time. Society holds these ‘truths to be self-evident’ more often than not.

To deny this is to shut our eyes tightly when we see the evidence. Aren’t Pepperidge Farm cookies superior to the store brand? Doesn’t the extra $1.99 convey this ‘fact?’

It’s become fashionable to take a look back ‘one year later’. Heck, CNBC is devoting an entire MONTH to asking, “Where are we?” one year removed from Lehman, IndyMac, Merrill, WaMu, Bear Stearns, etc. Enough already!

Very well – for those who long for the past here’s your fix:

The S&P 500 is relatively flat. The DJIA is down slightly and the NASDAQ is higher.

Commodity prices have collapsed, the Dollar is under siege and we’re all waiting on commercial real estate to be the next shoe to drop. To paraphrase Ed Koch (former mayor of NYC): “How are we doing?” Investor #1 bought into the panic. “Prices must be an indicator of value” they cried.

They dumped their holdings at the lows in September of 2008 and had a second chance to do so in March of 2009. Today equity markets are roughly 60% above these lows meaning these investors (1) missed out on the recovery or (2) bought back in at higher prices after locking in massive losses. Investor #1 is a performance chaser and as unhappy as ever.

Investor #2 has a perfectly accurate crystal ball. Mr. & Mrs. Omniscient sold all holdings at Dow 14,000 and bought back in at Dow 6,600. They may be found on the golf course (ever notice everyone else in the foursome never loses money?), in Wall St lure (think Elaine Garzarelli and The Crash of 1987 but where’s she been since?) or most often in Monday morning quarterbacking.

Investor #3 follows a disciplined, holistic strategy of living within their means, matching cash inflows to outflows, maintaining realistic debt levels and seizing on opportunities because they make sense – not because they are the only available options. These investors saw no reason to dump holdings at irrationally and artificially low prices. They were not forced to scale back risk. To ‘deleverage’ didn’t make sense because they weren’t leveraged in the first place. Their broadly diversified portfolios returned to more normal levels when the pendulum that swung too far in one direction came back the other way. They were not overly optimistic at Dow 14,000 nor were they overly pessimistic at Dow 6,600 and, today, are indifferent as we close in on Dow 10,000. These investors realize asset prices don’t reflect underlying fundamental value.

As the First Eagle Funds team puts it, “There is often wisdom in sailing a steady course despite stormy waters. When markets are unusually volatile many feel a tendency to zig and zag trying to be ahead of each development…

Sometimes it is better to simply watch the grass grow than to frenetically mow the lawn every week!”

Let’s be clear: no one is patting themselves on the back, no one is pointing fingers, no one is making light of recent history and no one is blind to reality. There have been very real outcomes of this financial ‘crisis’ from job losses to home foreclosures to diminished (although more realistic) expectations of what retirement might look like.

What we are doing is dispelling popular myths and reinforcing real truths.

MYTHS: Prices do not indicate value, grades do not indicate intelligence and
measurements of any kind rarely indicate anything meaningful. Rapid trading, market speculation and action for the sake of action will never be confused with intelligent investing. Equally mythical is ‘buy and hold’ as it’s too simplistic and a misnomer.

TRUTHS: More accurately ‘buy and rebalance’ conveys the philosophy. Diversify, manage risk, focus on fundamentals, sprinkle in some tax planning and don’t let emotions enter the equation. In airline parlance the novice flier can panic at the first sign of turbulence – the frequent flier arrives at his destination without the needless stress.

(EDITOR’S NOTE: For anyone interested in a fantastic treatise regarding the relationship (or lack thereof) of price to value/worth we strongly recommend the 04/30/09 shareholder letter authored by Brian M. Barish – President of Cambiar Investors LLC. It’s a bit lengthy (about 10 pages) and slightly academic/theoretical yet chock-full of historical references and poignant, biting commentary sure to make an impression. Please contact us for additional information.)

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