Fear and panic have taken over the
capital markets in recent weeks. Investors are worried that
they may be holding the next Enron or WorldCom in their
portfolios. The economic recovery is in question and the
summer doldrums are not helping matters. Selling pressure
has intensified and buying interest has disappeared. The
markets sell off and suddenly bounce back. Share price
volatility is extreme and is further compounding investor
concern and indecision. As the major indices revisit and
rebound from post-September 11th lows, we would like to
share some of our thoughts in an effort to help individuals
cope with such difficult conditions and alleviate some
concerns.
When investors, both retail and professional, are bailing
out of investments for emotional as opposed to fundamental
reasons, it is essential to remain disciplined. There is
simply no use in following minute-by-minute market moves
when irrational decisions are driving stock prices. We
believe that it is best to get away from the noise and
turmoil in the market and the media, to roll up one's
sleeves, to sharpen one's pencil and to plot an investment
strategy designed to take advantage of the situation.
Our first step is to carefully comb
through our portfolios and reassess each of our holdings.
Any stock that is close to our target price is earmarked as
a candidate that could be sold to take profits and raise
cash for a more attractive opportunity. The next step is to
draw up a "wish list" of potential investments. We
are looking for stocks that specifically fit our stringent
guidelines, as defined by our Ten Commandments of Value
Investing - for example a low price to earnings ratio, a
discount to book or net asset value, free cash flow or a
solid balance sheet. We then place a definite price target
on each candidate, identifying the level where we would
become a buyer of that particular security. Now is not the
time to lose one's nerve. Should any stock on our
"watch list" fall to our target price, as
professional money managers we must act decisively in our
client's interests and accumulate stock.
We are very comfortable with our
investment focus and deep value philosophy. We are also
confident with our present strategy. We believe that we will
avoid a "double-dip" recession. Interest rates are
at 40-year lows and the U.S. Federal Reserve is providing
for easy money to buttress economic activity. Despite the
stock market downturn, recent economic data has been quite
positive. Although business activity, especially in the
United States, may not be roaring back, at least we are
seeing signs that a recovery is taking hold.
Some have discussed the
"disconnect" between the economy and the markets.
Again, we believe that the market downturn has more to do
with emotional rather than fundamental reasons. This creates
a fantastic opportunity, as stocks are arguably more
attractive than ever. The keys to success remain, as always,
fundamental analysis, investment discipline and a long-term
outlook. Remember, the bottom of the market is not the time
for panic selling; it is the most opportune time to purchase
quality companies at historically attractive multiples.
Irwin A. Michael
