Value Library
The following is an
excerpt from the ABC Perspective - April 2000 - Pg. 1
Capitulation
The momentum has been building.
Television, radio and newspaper advertisements have been plentiful in
highlighting the ease of e-trading stocks. Rookie investors experience
the thrill of buying and selling stocks for as little as $8 a trade. It
appears that day-trading may have become our national pastime
supplanting our beloved ice hockey.
So far, there appears to be little
downside to investors’ double infatuation with day-trading and high
technology and telecommunications stocks. Neophyte financiers
experiencing their initial taste of profit have been increasing their
investment ante on each trade through record margin debt as their rising
bravado fills them with greater confidence. There appears to be no sense
of fear, only greed.
Technology stock initial public
offerings with little or no revenue or earnings but with extraordinary
expectations are snapped up within a heartbeat and triple in price. It
appears that no analysis is needed, nor is it necessary. One merely buys
stocks which will go up in price. There is no caution, fear or prudence.
Cocktail party chatter, similar to the childhood game of broken
telephone, magnifies profits to incredible sums. Ordinary individuals
with not even the slightest sense of rudimentary investment
understanding are rushing into this, the "new economy"
frenzied marketplace. High technology is the catch-word for year 2000,
comparable to the late 1960's "plastics".
Traditional conservative value
investment disciplines are tossed aside for being "old
economy" and out of step with the new investment reality. No one is
interested in Markowitz, Sharpe, alpha, beta or coefficients of
correlation. "Don't complicate investing", some people tell
me, "just buy and hold technology stocks to go higher and higher
and higher". Experienced value investors such as Warren Buffett are
deemed to be yesterday's story.
In spite of the present evidence,
I disagree with this new investing. I believe that there is yet another
extremely important chapter of value investing to be written. I would
neither underestimate the explosive potential of value investing nor
Warren Buffett. Unfortunately, patience today is a commodity in short
supply. In this go-go environment of day-trading
there is no patience. Investors only have an appetite for quick profits.
What is really going on? High
technology and momentum stocks are in and value is out. William Hanley,
an investment reporter for the Financial Post, commented about this
phenomenon in a February 8 article:
"… analysts and money
managers trying to push "value" stocks at the expense of
"growth" are just about the loneliest people since the
Maytag repairman. It must be difficult covering companies in areas
such as financials and cyclicals and watching the fundamental value
story falling on deaf ears."
One respected investment dealer
recently related to me that the stock market is going through a period
of "capitulation". This dealer further explained that with
heavy redemptions taking place at traditional value institutions, many
of these portfolio managers are selling off their "old
economy" value stocks and have been shifting to the high tech
flavours of the day. This capitulation may stem redemptions. In some
cases, this shift of style, in the short run, has paid off. But as the
crescendo of this capitulation shift continues to build through the
conversion of former value investors to born-again momentum investing,
it further feeds upon itself.
However, when will this momentum
investing return to "value"? While we are confident that value
investing will return, I cannot predict when. The decline trigger or
catalyst to precipitate the journey back to value could happen anytime,
for whatever reason. Perhaps momentum investors’ wild expectations
could be severely disappointed when a widely anticipated event does not
transpire. Momentum investors at that point might rush to the exits and
discover that "the emperor (i.e. stocks) is not wearing any
clothes". This realization might be the straw that breaks the
camel’s back. It also could be the ultimate catalyst leading investors
back to the value investing world of cash flow, price to earnings
ratios, book and net asset values.
Irwin A. Michael, CFA
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