Tag Archives: challenges

Hope Is A Long-Term Investment

The Short-term Outlook is Dark.

The unfortunate reality is that we are going to face tough economic times in the short term.

Furthermore, certain “structural” factors in the credit markets have led me to believe that the market prices of assets (including most stocks) have more downside risk than upside potential in the short term.

The key data point here is one of supply and demand. Anywhere from 65-80% of demand in the corporate bond and bank debt markets came from highly-levered entities including CLOs, CDO’s and SIV’s over the last few years. These entities no longer have leverage available, and thus are not buying assets. Until this problem is mitigated, prices will continue to fall in the credit market even if we ignore the weakening underlying fundamentals.

Add to this the facts that: a) the economy has only just started slowing down, b) job losses have been relatively muted to date, and c) the key to this whole puzzle – the underlying housing market – is still facing massive challenges the foremost of which are homeowners underwater in their mortgages, and it is easy to see why things don’t look good in the short term.

However, *if* you are willing to keep a long term focus there is light emerging on the horizon.

Reasons For Hope.

1) Barack Obama is the President-elect.

I want to point out that I am not a Democrat. I am not a Republican. I am an American who finds it equally deplorable to see the disrespect that people show our current President (discussed by the WSJ here: The Treatment of Bush Has Been a Disgrace) as I am optimistic with the election of our new President in Barack Obama.

He stands for something: the kind of optimism and hope in our country that is very important in times like these.

But don’t forget, President-elect Obama called for a sense of service and sacrifice. And he meant it.

2) We have a sense of solidarity again.

This is delicate. We can’t let the short term bad news over the coming months distract us from the momentum this election has achieved.

Voter turnout was the highest it has been in a century. You cared, and your voices were heard.

Last night people were literally dancing in the streets across the country singing God Bless America.

This patriotic spirit is essential for us to collectively overcome the challenges we face.

3) Our long-term economic prospects are strong.

We are the most innovative country in the world.

Trends such as in the success of web services like Twitter; the current adoption of the mobile internet on devices like the I-Phone, the Blackberry Bold and the G1; innovations in clean nanotechnology; and countless other great opportunities show that there are tons of great things happening in our country today.

Our economy is $13T and even if it declines by the greatest amount in history it will still be the largest and strongest economy in the world by a long shot.

Keep A Long-Term Focus.

Emulating great investors like Warren Buffett, we should disentangle the long-term value from the short-term “signal” and technically-driven prices.

The short term is murky, but the long-term truly is hopeful.

The sun has set and we are in the midst of a cool and dark night. The silence is almost deafening, but on the horizon rays show the Hope of a new day. And now we have a leader to take us there.

Perspective Matters. Especially In Tough Times.

The Reality: We are facing real challenges.

I really hate to admit it, but I think there is more bad news on the horizon. The news coming out of the hedge fund industry is really troubling, and the issue with this industry’s challenges (like that of the banking industry) is that as these firms are forced to sell assets en-masse, values of securities fall in a disproportionate relation to their intrinsic value.

This phenomenon is very similar to the one that is occurring in the housing market: banks are foreclosing on houses, and selling them into a market where there are not enough buyers.

These pressures are likely to remain for awhile. And we should be prepared for this.

In addition, the pressure that the middle class in America is feeling from strained personal balance sheets in addition to a growing pessimism about the economy will likely cause spending to fall as: 1) people stop buying because they are worried and 2) people stop buying because they just can’t stretch any farther and no one will lend to them.

All of this is likely going to materialize slowly over the next few weeks and months.

Warren Buffett’s Pro-American stance.

However, now is not the time to dwell on these issues.

As I mentioned below (Dealing With Bad News), it is natural to retreat into a cave when bad news strikes. People don’t like to face the music and unfortunately this is materializing in the markets as investors stand on the sidelines in fear.

However, at least one investor – and arguably the best investor in History – is buying American stocks. And urging the rest of us to do so: Buy American. I Am.

If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why? 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.

….

Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.

Warren Buffett is stepping up in the way that few others in this country have done yet to point out in simple and clear terms: America has the best economy in the history of the world, and we can’t lose sight of all of the great companies and innovation going on here today and the strength of our economy in the long term.

Case in point, Google, a perfect example of the kind of innovation that makes this country great, has continued to grow as advertisers continue to recognize that the old media’s approach – pushing ads down people’s throat – has been defeated by Google and others who allow us to consume our content (and our advertising) in ever more flexible and personalized ways.

In addition to Google and new media there are exciting things happening in education, clean technology, biotech & healthcare, the entertainment industry, the power industry, biotech plastics, and many other industries.

So before you give up on our country while it is down, step back for a moment and think about it.

Optimism has real impact.

Someone I admire a lot told me today about a study that was done recently where 2 groups were given a set of identical household tasks to perform over a period of weeks. Group 1 was told nothing special about their chores. Group 2 was told that the tasks they were performing as a good form of exercise and good for their health by a group of healthcare professionals.

A surprising result ensued: those who *believed* their efforts were healthy for them lost weight, lowered their blood pressure and got healthier.

This was a study done by serious researchers at a major academic institution. The takeaway: our perspective sometimes matters as much as the reality.

I believe we are capable of facing the world, the good and the bad parts of it, and keeping our optimism intact. And right now our country needs us to do just that.