Sentiment in the investment world can turn very quickly. The transition from optimism, to complacency, to worry is now well underway. Investors who had grown comfortable in assuming greater risk are now seeking shelter, and the fear of losing is only rivaled by the fear and shame of being wrong. Most will keep a level head and stay the course, heartened by the hard-learned lessons from prior investing mistakes. But while that may describe the general attitude, there are always those who violate their discipline in an attempt to either avoid some near-term pain, or opportunistically pad their investment returns. These “market timers” might best be described as speculators as opposed to investors.
Long-time readers will know that we subscribe to the Warren Buffett school of market psychology. Buffett says that during times of market turbulence, investors’ concerns over prices invariably increase as the prices improve (i.e., go down). Conversely, when prices are increasing and recording new high after new high, investors are willing to commit new funds with aplomb. Buffett articulated his thoughts on the subject in an October 16, 2008 op-ed in the New York Times:
“A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.”
Fast forward to 2016. Though prices for many high-quality stocks may be 20% or more below their recent highs, many investors are responding with an abundance of caution and concern. And the skittishness spreads well beyond the equity markets. Many commodities, including energy, industrial metals, agricultural products, and more, have suffered much larger decreases than equities over the past year. We wonder what Buffett would say about the investment prospects for commodities right about now.
At a number of my recent speaking engagements, I have been asked for my advice about oil. Buy or sell? My answer has involved a review of history. In June of 2008, oil traded at almost $150 a barrel. In January 2016, oil fell to below $30 a barrel. In the context of the past seven and a half years, oil is now trading in the bottom price quintile. If the rule is to buy low and sell high, this is certainly not high. I can’t predict if oil will or will not go to $20 a barrel. I have no idea. What I do know is that it is better to pay a price in the bottom quintile than to pay a price in the top quintile. Readers may also remember that in May 1999, the cover of The Economist read, “Drowning in Oil” when oil was trading at about $11 a barrel. The Economist predicted it would go to $5. It never went below $10. Calls from investors were to sell oil and buy dot coms. Of course, investors should have done the reverse.
Volatility begets fear. Long term successful investors heed the advice of the fish markets: ignore the yelling and pay attention to the price of fish. In other words, take after Warren Buffett and learn how to use fear to your advantage. At this moment, our very experienced team of analysts and portfolio managers are pouring over quarterly earnings reports, adjusting their financial models and questioning our data and theses point by point. Our process is dispassionate, and our decisions are deliberate and disciplined. This economy does not feel good. Earnings are lackluster, and politicians crowd the airwaves with calls for better days. Periods of disruption create opportunities. We have been through difficult markets before. We will get through this one. We will continue to try to benefit from opportunities as we find them, and defend against threats in every form.