The Deipnosophist

Where the science of investing becomes an art of living

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Location: Summerlin, Nevada, United States

A private investor for 20+ years, I manage private portfolios and write about investing. You can read my market musings on three different sites: 1) The Deipnosophist, dedicated to teaching the market's processes and mechanics; 2) Investment Poetry, a subscription site dedicated to real time investment recommendations; and 3) Seeking Alpha, a combination of the other two sites with a mix of reprints from this site and all-original content. See you here, there, or the other site!

12 March 2008

And where she stops...

The market decline of the past 4 months has been especially ferocious and pervasive that, quite honestly, it seems to have been around for far more than merely 4 months. So does this decline qualify as a bear market?

Bear markets, at least as I denote them, occur rarely. Whereas market up trends tend to be typical, usual, enduring, and the investors' mindset, general market down trends (bear markets) tend to be rare largely because no market is monolithic. Only rarely do all groups and sectors trend down; some group(s) somewhere bucks the trend. The trouble, for the market observer reliant on general market averages for directional cues, is whether the rising group or sector is a component of the market average or index; if not, than that group's rising prices provide no support to a declining market.

Many articles and commentaries circulate today that serve to frighten the bejeezus out of each of us; for example, this excellent Atlantic Monthly article by James Fallows, which is intelligent, well written... and disconcerting. Needless to say, there are others of its ilk. To further mine that vein, market action the past several months reveals an acceleration both of the down trend of the US$ and the up trends of gold, oil, and most commodities. Equities have been caught in the crossfire, and thus sold for a variety of reasons, including the (desperate) need for liquidity and the fear that today's price will be higher than tomorrow's price.

Which qualifies as only one reason I believe faith to be a prerequisite to invest long term. (That is, to identify and invest in a leading company that offers the best product or service in a growing industry.) The investor requires faith because, in the final analysis, a stock is little more than a piece of paper -- unlike (corporate) bonds, which represent a senior claim on a company's revenues. And do not forget that investment bankers create new pieces of such paper (shares of equity) seemingly every day. In one sense, stocks qualify as a giant confidence game; as long as we believe in the system, the game continues. Of course, investing is not really a con game, but the suspension of disbelief required to believe the markets', and the economy's, structure will not implode also qualifies as a form of faith. In addition, the investor relies on faith to carry him through the ubiquitous cloud of unknowing and uncertainty, to buy when other investors sell, to acknowledge the possibility of follow-on short term financial pain after he or she invests, and the vagaries of time. Lots of time. Time might heal all wounds, but it also creates its own uncertainty; really, who knows what the future will bring, whether fashions, stock prices, or Presidential elections.

Consider Google/GOOG. Pretty much the market leader straight out of the chute (post-IPO), the company and its shares became Wall Street's darling -- until the shares peaked in November 2007; its $300 decline since then erased its gains from October 2006. In doing so, its sudden decline breached crucial levels of support. Or did it?

[click on chart to enlarge]

Negative articles proliferate about Google/GOOG as well; one commentator suggests the shares now could plummet as low as $350. He certainly hopes such an event occurs; it would allow him the opportunity to cover his short position for a 100% loss. (Yes, he has been recommending investors short GOOG all the way up.) After looking at the chart above, ask yourself these questions:
1) Is Google today the same company it was 18 months ago?
2) Is Google a better company today than 18 months ago?
3) Are Google's revenues and earnings the same level, or even less, than 18 months ago?
4) Is Google a flash in the pan company; here today, gone tomorrow?
5) Will Google continue to grow as a company, and as enterprise?
6) Is today's price, recent ferocious down trend notwithstanding, a fair price for investors?

Long term investors always ask questions of this type; other questions, whether re company fundamentals, stock valuation, or stock chart analysis are all ephemeral. For example, all trends die, which is the precise purpose to identify and delineate trend lines. (Those moments provide inflection points.) And, yet, despite the presumed horrid news ("Google shares are collapsing! I told you the company is another dot bomb..."), the company itself remains. Throughout its 40 month bull market straight out of the chute, many investors hoped for a correction in Google's price and value that would allow them the opportunity to invest inexpensively, even cheaply. So here is the opportunity you hoped for, handed to you on a silver platter, tarnished though it might appear. Will you seize the moment?

Yes, it is difficult to catch a falling safe, and Google/GOOG's plummet earthward has been frightening. This recent down trend could continue. But will it? You buy at $420, and GOOG continues its plummet to $350 -- what then? Is a deeper decline to $350 from $420 truly consequential when the decline began at $750? How low is low, before a countervening trend occurs? Certainly, the more bearish yammering about GOOG, the better I feel.

Those last comments might seem, at first blush, simple, even simplistic; I argue them to be elegant. We each, as humans, have a preference to prefer the complex answer to the simple; complexity, as explanation, makes nothing more transparent; it only obfuscates. Moreover, I believe complexity in the service of explanation to be the work of charlatans. Probably no surprise that I seek the elegant answer in everything.

Which includes technical analysis, a valuable tool to identify reversals and trends. TA certainly is not for everyone; heck, most investors use it incorrectly, and then deride it when the 'answers' gleaned from their faulty analysis prove wrong. That comment aside, I note various technical measures suggest GOOG's decline could have hit bottom at $413, although a secondary test in the days and weeks ahead would not be uncommon. For the nonce, I seek chart clues that $413 will prove to be the low trade of this correction. No prediction, but, as an investor, I like Google/GOOG at $420. Google/GOOG, however, is not alone out there, screaming, "Buy me... steal me!"

Despite what you might read elsewhere, positive investment returns can be made in all market environments, although the requirement for extra prudence arises during severe declines.

Full Disclosure: Long Google/GOOG.
-- David M Gordon / The Deipnosophist

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