Steady nerves are needed when the bullets start to fly
AVNER MANDELMAN Saturday, July 29, 2006
Five years ago, in August, 2001, Giraffe's monthly letter to clients tried to explain that good stock values often appear in times of war. I claim no prescience, and can no longer remember why I chose that topic. (This was three weeks before Sept. 11.) Maybe it was because our databases were picking so many tech values that the market was disregarding and no one but us was buying and so I felt besieged.
At any rate, I tried to be cute and titled the piece "Valuations in times of bombardment," (you can read that piece on Giraffe's website), then added a true-life example -- which I shall now shamelessly plagiarize before segueing into its relevance today. Here is that example, summarized.
In 1982, a war broke out between Israel, the PLO, some Lebanese militias, and various local drug lords (there's some redundancy here). In the midst of the fiercest bombardment, a scion of an old Lebanese merchant family (related to an economist I knew) decided to buy an office building on Rue Verdun, Beirut's main drag, because the war dropped local real estate valuations to next to nothing. (Worldwide, too, the financial markets were plunging.)
Friends of the guy tried to dissuade him, but to no avail. He plunked down 50 grand in U.S. cash and bought the building. (Even in the midst of war the registry office functioned -- the mark of a fundamentally civilized country.) The seller took the cash and departed to Paris, where he bought a one-room apartment, which over the next 10 to 15 years became $200,000 (U.S.). What of the buyer? He had to suffer through some years of turmoil and rebuilding, but within 20 years his property became worth several millions.
Which brings us to today -- Lebanon is again at war and the stock market is swooning. Does today's war also signify a market bottom? You may recall that Lord Rothschild famously said one should buy when war's cannons boom, and sell when victory's trumpets sound. Is it the same now? I claim no prescience. Instead, let's look at the record of Mideast wars as predictors of market bottoms, or at least abundance of values.
That region has been warlike for the past 5,000 years (as evidenced by weapons found in all layers at archaeological digs), but I suggest we stick to the last generation's wars.
The first Mideast war of modern times, 1967 (one in which I participated), saw the market rise for about a year afterwards, into 1968, before it plunged toward the 1970 bottom. (Curiously, in 1968 Warren Buffett closed his investment partnership, saying he could find nothing to buy.) The next war, 1973 (the Yom Kippur war), preceded a year of market decline before a bottom of sorts was reached in 1974. Then came eight years of sideways movement until August, 1982, when a war similar to the current one broke out in Lebanon -- as per the above example. That time, however, the market made a historic bottom almost concurrently, and did not look back, except for corrections and brief crashes (such as 1987). Then nine years later, in 1991, the first Gulf war took place, when President George Bush senior came to Kuwait's rescue. And again, that was precisely predictive just as the 1982 war was: Gulf 1 broke out on Jan. 17, 1991, and the market bottomed that very same month, with both stocks and bonds (especially junk bonds) taking off, tech stocks zooming, and fresh bull market geniuses born every day.
The next Mideast-related war (or at least warlike event) was Sept. 11, 2001, which Giraffe's letter so eerily preceded. The market plunged for one more week, vacillated, bottomed in October, then rose for six months before plunging again and bottoming a year later, in a complicated year-long bottoming process. There were perhaps a few more unsettling months leading to March, 2003, when the second Gulf war started -- and this was of course yet another historical market bottom that saw the market rise for the next few years.
So what can we say about war's predictive power today? Even those who invest on fundamentals may occasionally find themselves holding on to terrific values, which no one else wants for a while, before they receive their just rewards -- just like that Beirut resident of long ago. Will the bottom now be quick, 1982- and 2001-like? Or an extended one, like 1973-1974?
For all those who invest on fundamentals, this is almost an irrelevant question. You buy when you find a compelling value, and can purchase a dollar for 50 cents, and if it falls to 40 cents, you buy more and wait. But I cannot help but point out that Warren Buffett himself -- the same one who quit the market (for a while) in 1968 -- very recently made a $4-billion acquisition, in Israel, of all places. Therefore, in this case, we do not need to have an opinion, as Mr. Buffett's will suffice: He thinks one of most bombarded regions in the world is now a good place to invest in.
Will he prove as prescient as that Beirut merchant of long ago, in 1982? Time will tell. But it should also tell you that if you find a deep value, do not let present war conditions deter you. Wars come and wars go, but markets always remain.
Avner Mandelman is president and chief investment officer of Giraffe Capital Corp., a Toronto-based money management firm.
amandelman@giraffecapital.com
Five years ago, in August, 2001, Giraffe's monthly letter to clients tried to explain that good stock values often appear in times of war. I claim no prescience, and can no longer remember why I chose that topic. (This was three weeks before Sept. 11.) Maybe it was because our databases were picking so many tech values that the market was disregarding and no one but us was buying and so I felt besieged.
At any rate, I tried to be cute and titled the piece "Valuations in times of bombardment," (you can read that piece on Giraffe's website), then added a true-life example -- which I shall now shamelessly plagiarize before segueing into its relevance today. Here is that example, summarized.
In 1982, a war broke out between Israel, the PLO, some Lebanese militias, and various local drug lords (there's some redundancy here). In the midst of the fiercest bombardment, a scion of an old Lebanese merchant family (related to an economist I knew) decided to buy an office building on Rue Verdun, Beirut's main drag, because the war dropped local real estate valuations to next to nothing. (Worldwide, too, the financial markets were plunging.)
Friends of the guy tried to dissuade him, but to no avail. He plunked down 50 grand in U.S. cash and bought the building. (Even in the midst of war the registry office functioned -- the mark of a fundamentally civilized country.) The seller took the cash and departed to Paris, where he bought a one-room apartment, which over the next 10 to 15 years became $200,000 (U.S.). What of the buyer? He had to suffer through some years of turmoil and rebuilding, but within 20 years his property became worth several millions.
Which brings us to today -- Lebanon is again at war and the stock market is swooning. Does today's war also signify a market bottom? You may recall that Lord Rothschild famously said one should buy when war's cannons boom, and sell when victory's trumpets sound. Is it the same now? I claim no prescience. Instead, let's look at the record of Mideast wars as predictors of market bottoms, or at least abundance of values.
That region has been warlike for the past 5,000 years (as evidenced by weapons found in all layers at archaeological digs), but I suggest we stick to the last generation's wars.
The first Mideast war of modern times, 1967 (one in which I participated), saw the market rise for about a year afterwards, into 1968, before it plunged toward the 1970 bottom. (Curiously, in 1968 Warren Buffett closed his investment partnership, saying he could find nothing to buy.) The next war, 1973 (the Yom Kippur war), preceded a year of market decline before a bottom of sorts was reached in 1974. Then came eight years of sideways movement until August, 1982, when a war similar to the current one broke out in Lebanon -- as per the above example. That time, however, the market made a historic bottom almost concurrently, and did not look back, except for corrections and brief crashes (such as 1987). Then nine years later, in 1991, the first Gulf war took place, when President George Bush senior came to Kuwait's rescue. And again, that was precisely predictive just as the 1982 war was: Gulf 1 broke out on Jan. 17, 1991, and the market bottomed that very same month, with both stocks and bonds (especially junk bonds) taking off, tech stocks zooming, and fresh bull market geniuses born every day.
The next Mideast-related war (or at least warlike event) was Sept. 11, 2001, which Giraffe's letter so eerily preceded. The market plunged for one more week, vacillated, bottomed in October, then rose for six months before plunging again and bottoming a year later, in a complicated year-long bottoming process. There were perhaps a few more unsettling months leading to March, 2003, when the second Gulf war started -- and this was of course yet another historical market bottom that saw the market rise for the next few years.
So what can we say about war's predictive power today? Even those who invest on fundamentals may occasionally find themselves holding on to terrific values, which no one else wants for a while, before they receive their just rewards -- just like that Beirut resident of long ago. Will the bottom now be quick, 1982- and 2001-like? Or an extended one, like 1973-1974?
For all those who invest on fundamentals, this is almost an irrelevant question. You buy when you find a compelling value, and can purchase a dollar for 50 cents, and if it falls to 40 cents, you buy more and wait. But I cannot help but point out that Warren Buffett himself -- the same one who quit the market (for a while) in 1968 -- very recently made a $4-billion acquisition, in Israel, of all places. Therefore, in this case, we do not need to have an opinion, as Mr. Buffett's will suffice: He thinks one of most bombarded regions in the world is now a good place to invest in.
Will he prove as prescient as that Beirut merchant of long ago, in 1982? Time will tell. But it should also tell you that if you find a deep value, do not let present war conditions deter you. Wars come and wars go, but markets always remain.
Avner Mandelman is president and chief investment officer of Giraffe Capital Corp., a Toronto-based money management firm.
amandelman@giraffecapital.com
Labels: AVNER MANDELMAN
posted by financeblog at
4/22/2007 01:40:00 AM
0 Comments:
Post a Comment
<< Home