Tuesday, July 13, 2010

Doug Kass: Fear & Forecasts

Markets move from emotional high to low but long-term investing results come down to the quality of individual stocks you own and the price you pay. The opportunity to buy businesses well below their intrinsic value comes when fear is pervasive.

Influential market and economic forecasters sometimes keep investors from making prudent long-term purchases (or worse...cause some to sell low) because they magnify fears during a crisis (take your pick - banking, sovereign debt, oil spills, war etc). There will always be another crisis and the time to build positions is often when it feels pretty awful.

The gloomiest forecasts became the loudest in early 2009...just when buying was the most prudent.

Yet it felt great to buy from 1998-2000 when prevailing prices were high (bad time to buy).

It's never obvious until after the fact.

Those in the business of making forecasts learned long ago it is profitable (if you want to sell books or newsletters) to make an extraordinary claim about the future. Ordinary claims don't sell.

Quality analysis and judgment matters. Charlie Munger calls professional forecasters "sheep gut readers"* (in reference to kings who once hired forecasters to interpret sheep guts to predict the future). Pretty useless.

Good businesses have thrived, producing high returns for investors, over the decades as the world went from one crisis to the next.

Having said that, the reason I am posting a recent article written by Doug Kass is not because he may be right in his forecast. It's because, among forecasters, Kass tends to have solid contrarian judgment and little tendency toward hyperbole. Kass also seems to avoid the perma-bear or perma-bull syndrome found among many forecasters.

Excerpt:
For a rough parallel, he said, go all the way back to England and the collapse of the South Sea Bubble in 1720, a crash that deterred people "from buying stocks for 100 years," he said. This time, he said, "If I'm right, it will be such a shock that people will be telling their grandkids many years from now, 'Don't touch stocks.'
--New York Times interview with Bob Prechter

On cue, the New York Times Jeff Sommer prominently interviewed Bob Prechter in Sunday's Business section. The Elliott Wave devotee is forecasting a DJIA "well below 1,000 in the next five or six years."

Prechter's comments are a classic example of Roubini-like hyperbole. As I have often written, both perma-bulls and perma-bears are attention-getters, not money-makers. Avoid their views like plagues. I do. Those views might make for juicy headlines, but they are not typically substantiated by rigorous analysis. Importantly, their views rarely prove accurate or value-added. - Doug Kass

I never have a strong opinion of the market direction. If the market gives me a good price on a stock I buy. It was easy to see we were in an extreme bubble based upon price vs intrinsic value of most equities in the late 1990s...but I still didn't try to figure out what the overall market was going to do. I just didn't buy the clearly overvalued stuff.

My interest is in buying good businesses with long-term competitive advantages at fair prices. That's it.

Charlie Munger and Warren Buffett have said they ignore market forecasts. They make money buying quality businesses at the right price and mostly owning them for a long time.

Adam

* Found under Notes from 2004 Annual Meeting
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