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October 1, 2008

Holy Insanity! What a week. There are not enough superlatives in the English language to describe this week but the following quote from the WSJ captures it well, “The Dow’s 1.5% decline on Friday represented its best daily performance amid an otherwise miserable week. The Dow plummeted 1874.19 points, or 18%, this week, worst in its long history.” For the first time in 112 years, the Dow Jones Industrial Average swung in a range of more than one thousand points on an intraday basis.

Every day this week, the market swung violently. It tried to rally numerous times, yet failed to hang on to any gains. One day, I think Tuesday, the Dow dropped more than 500 points in the last ten minutes of trading. Remarkable. Simply remarkable.

My orb (if you don’t get the reference, ask me when we talk next) is not only glowing blood red, but it’s pulsating—something I didn’t know it could do! Another first for the week!

I could go on for hours describing the carnage, but I won’t. Now that I’ve got you sufficiently depressed, I’d like to tell you why I’m NOT.

Simply put, the market’s mood changed in the last hour of trading on Friday. I saw it. I felt it. And I prayed for it. We rallied back from a 700 point loss on the Dow to close only 128 points down for the day. A pyrrhic victory, but a victory nonetheless. Barely 5 minutes before the close the Dow was in the green. Green is good!

Normally, as y’all know, I wouldn’t dedicate two brain cells to talking about the market’s mood, momentum, or such short-term concerns, but these aren’t normal times. The market has been taken over by a wave of fear driven by uncertainty. It’s in a panic. Fundamentals don’t matter.

Fundamentals don’t matter to them, but they matter to us, which is another reason I’m only consuming one bottle of wine before noon instead of two. I’m confident the great majority of core holdings in each portfolio I manage (many of which mirror my own holdings) because I’ve done my homework. I understand these company’s fundamentals, their growth drivers, their normalized margins, and most importantly at a time like this, their balance sheets. They’re sound companies with sustainable business models and may even advantage from this carnage as the weak drop off like moths entering a bug light.

Most of the companies you own are cash generating machines. Will this cash flow slow over the near future as we trudge through this recession? You bet it will. Will its earnings per share decline? Guaranteed! Will it go the way of the Dodo bird? Not a chance. In fact, if each client doubled down on their AUM with me, I’d probably spend 80% of the funds on the same holdings you have today. I liked the companies four months ago, and like them even more today. When I bought these companies I bought them based on what I expected over a 5+ year period of time. Not next week. Not next quarter, And not next year. In fact, you may notice I bought into this mess for some of you.

Again, I’m not attempting to toot my own horn and realize many of you won’t notice the drop for some weeks to come until you open your brokerage statements in November—should you choose to do so. My goal is ease your fears and tell you I’m paying attention—a lot of attention. I’ve made very few sales and a few buys during this turmoil because many of you were already fully invested, but I’m following the companies for changes in their fundamental business models and/or debt exposure. If I smell destruction, I’ll sell. But I will not sell in fear. I will not sell in panic. And I will not extrapolate—as the traders do all too often—the current conditions into the future. I may not look like John Houseman, have the experience of Warren Buffett, or market stabilizing oratory skills of Maestro Greenspan, but I do have discipline, a spine, a strong sense of history, and one hell of a contrarian belief. Buy when the markets are most fearful and sell when they’re exuberant.

Nobody alive has ever seen anything like this. The last panic in the U.S. was in 1907, if my history serves me well. I don’t presume to know when it will end—although my earlier comments hint toward my anticipation—but I do know it will end. We’ve pulled out of every disaster in the past and we’ll pull out of this one. If I didn’t believe that I wouldn’t have the majority of my personal wealth invested in U.S. securities and certainly wouldn’t have chosen this gut-wrenching, 24/7, difficult career.

As always, if you have any questions, gripes, or comments, don’t hesitate to call—day or night.