houston we have a problem, page-24

Hope we are both wrong, Streettalk, That's a lot of pain ahead if to be so.

VLAD: this, from Marcus Padley, may be of assistance to you
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Had an email from a broker this morning: “Bearishness is music to my ears…..we cant be far from the bottom now…the minute everyone throws in the towel is the minute we should be getting in the ring and buying quality blue chip companies with low debt, surety of earnings and cash to fund growth".

My reply:

Who do you think you are – Warren Buffett?

You are throwing yourself on the rocks constantly trying to tell clients to buy the day before a change in sentiment – sentiment completely dominates at the moment – the fundamentals have become almost irrelevant – you can quote yields and PEs and long term value – but its all a irrelevant unless sentiment changes - sentiment rules - you would be far better off waiting for it to change than guessing its about to.

Do you really think you can justify buying today – to do so is simply to adopt a blindness to the short term and to trust in the long term to make you right. But you have to be realistic – everyone talks like they are Warren Buffett – but they are not – no one has his capacity to wear a loss. It OK for him, but you cannot afford to keep advising people to buy for the long term and have them lose money in the short term. Their losses in the short term will ruin your relationships.

The short term evidence stacked against us is overwhelming….value is not compelling/believed, earnings certainty is non existent, the results season holds risk not reward, the currency has damaged a lot of earnings numbers and it will get worse with the US$ and economy in a hole, the Australian property market is showing signs of following the stockmarket, the US housing market (key to it all) is worse, the oil price continues to go against us, the property trusts are telling you the commercial property market is stuffed (and it takes ages to recover), inflation will hold interest rates up well into next year, the Banks are having to raise capital at over 10%, corporate ambition has been replaced by conservatism, Citigroup tell us we are in Phase I of the downgrade cycle (and there are three Phases) and all the economic numbers in Australia point to recession and future consumer pain.

And you're going to stand like King Canute and say "Forget all that. Buy" as if your clients are all Warren Buffett gurus immune to loss.

The uncertainty over the credit crisis dominates that call – that uncertainty more than any other needs to bottom before anything goes up.

The good news is that at some point it simply will. One day (it was March 13th 2003 last time) things will simply change. Uncertainty will bottom and we will instantly flip flop and begin to believe the value and voraciously pursue it. Then you buy – when things start going up. Not when they are going down. There is no need to be the first to buy. It is too smart, pompous and risky to buy before the event. You’ll still make plenty by missing the very bottom and buying on the up – and you’ll save yourself from making more losses if the market remains in this mood.

The bottom of a bear market is “the condition of declining market prices that forces even long term investors to take financial losses”. When the really sensible people give up – that’s when you start buying. Tell me when you give up.