Value Library

The following is an excerpt from the ABC Perspective - April 2009 - Pg. 16

Adversity

It would be a serious understatement to proclaim that we have been through difficult economic and financial times. Clearly, we have experienced the worst economic downturn since the 1930s depression. Over the past year we have been confronted with major bankruptcies, costly Ponzi schemes, spreading layoffs and rising unemployment, skyrocketing U.S. home foreclosures, massive international government monetary and fiscal stimulation as well as ballooning governmental spending deficits. Furthermore, an all-pervasive media attention has focused on this expanding negativity such that a powerful crescendo of economic despair is permeating worldwide consumer and business confidence. To many the glass is not half empty, but rather, it is bone dry. In fact, there are increasing expectations of worsening economic news which is further compounded by the rising shrill of the well-publicized economic doomsayers who are getting increasing exposure.

In all candour, I have a different take on all these negative economic events. True, there is no denying that worldwide economic conditions have deteriorated significantly compared to the past five or so years and that we are less well off. I do, however, believe in human nature and the ingenuity of mankind to confront and triumph over adversity. I believe in man’s innate skills and cleverness in planning to overcome mental or physical economic roadblocks. In effect, I believe in the old saying that “necessity is the mother of invention.”

Presently, as I review the three major factors of production: interest rates, labour costs and rents/real estate, all three are at cycle or, in the case of interest rates, are at record lows. It is my view that in spite of all the massive negativity, what a great time to invest during this chaotic period. As many nervous investors pile up their cash in anticipation of lower and lower asset prices, attractive valuations are becoming more and more apparent. Few are courageous enough to face this economic adversity and through the clever purchasing of assets set themselves up for the next major economic upturn. Admittedly, not everyone has the financial or psychological wherewithal to confront the present economic recession with astute asset purchases. However, for those who are capable, there are many interesting and potentially lucrative opportunities without much competition. In the context of a 12-24 month time horizon these purchases will look golden in retrospect.

In an April 2009, Report On Business Magazine interview with Gene Simmons, member of the rock group KISS and star of the TV Program, Family Jewels, I was particularly struck by the singer’s entrepreneurial zeal, down-to-earth wisdom and positive outlook. When asked by the reporter: “What’s your take on the American economy?” Simmons replied…

“It’s in a whirl. This is a great opportunity for you to stop spending stupid money, stop smoking, stop drinking, stop ruining your health and paying for the privilege…take all that money, all the stupid money, and buy. But don’t buy stupid stuff. Buy real estate. Buy important things. It’s the best time – the price is low.”

These well-spoken words, I believe, are worthy of remembering during this period of heightened adversity, financial turmoil and remarkable opportunity.

Irwin A. Michael, CFA