Value Library
The following is an
excerpt from the ABC Perspective - October 2001 - Pg. 3
Uncertainty
"Markets are
constantly in a state of uncertainty and flux and money is
made by discounting the obvious and betting on the
unexpected."
- George
Soros
Webster's Dictionary
defines uncertainty as: not determined or fixed; subject to
chance or change and not dependable; in doubt; not sure and
not definitely known. In light of the events leading up to the
tragic September 11 milestone and those occurring thereafter,
it is safe to say that investors are operating in an extremely
uncertain market environment.
This uncertain and
stressful investment setting, however, does present many
opportunities. Investors who are willing to look beyond the
multitudinous short-term economic concerns and instead focus
on solid corporate fundamentals over a 12-18 month time
horizon will, we believe, reap superior investment returns.
But this present all-pervasive uncertainty unfortunately
places a heavy macro risk burden to the normal process of
stock selection. The question is: if the world economy is
heading toward a severe international recession, why even
purchase any economically-sensitive common stocks regardless
how fundamentally cheap they may be? Investors appear to be
grappling with this very question. As a result, many are doing
nothing in the marketplace until the uncertainty dissipates.
Now ponder this point: if
everyone knows about the economic risks and if investors are
already discounting this in stock prices, then perhaps stock
prices are near bottom. If this is so, as we believe, any bit
of relatively good news will act as a prime catalyst to spark
sharply higher stock prices. In essence, by taking a more
optimistic contrarian view to the current negative investment
sentiment, proactive investors are able to purchase common
shares at a maximum discount to their intrinsic worth.
By leaning toward the
unexpected, particularly in an uncertain economic period,
investors have historically performed rather well. While this
statement may appear rather trite, the fact is that when
everyone is worried about economic and political uncertainty,
then by and large, this concern is factored into stock prices.
Again with stock prices relatively low, investors can purchase
securities at their leisure and with little competition. Then
when the perceived uncertainty clears, as it eventually does,
investors gingerly reenter the marketplace; usually this
occurs at substantially higher price levels.
In a nutshell, it is our
sense that the greater the uncertainty, the greater the
opportunity. As difficult as it may be, the thick-skinned
investment opportunist who bothers to grasp this concept and
is prepared to act propitiously is, in the long run,
handsomely rewarded.
Irwin A. Michael, CFA
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