Quality Speaks For Itself

A week to tell your Grand Children about…….

Posted in Markets by Dipen on October 13th, 2008 05:26pm

We have been away in Dubai during the past week and witnessed the tumultuous events in the financial markets from afar and also with the benefit of a different perspective.

Firstly, these are truly historic times that will be taught to our grandchildren, provide many students with the perfect material for their theses, and truly change the way that we take responsibility for our own financial security in the future.

Consider these startling observations:

• Who would have believed that having ‘money in the bank’ would be something to be concerned about!
• Who would have believed that developed world countries could go bankrupt!
• Who would have believed that central banks would be powerless to stop the endemic rot that is gripping financial markets, despite the greatest concerted effort by all the major powers around the world!
• Who would have believed that governments would be forced to nationalise the very pillars of the capitalist marketplace, the banks!
• Of course fear is the greatest driver in these times, and no asset class is left untouched by the carnage, whether good or bad. But as rational investors, we must look at the facts, and see if the underlying circumstances have been altered before we arrive at our own assessment.

In truth supply and demand factors that existed previously have to be reanalysed and reassessed. Let’s take the example of a global commodity oil, that has been very much in the headlines over the last few months:

As we are all aware crude oil prices are approximately 40% lower than the peak reached earlier this year, currently trading at around $85. However it is only two months ago that I read a note from the oil specialist at my stock broking firm that prices could hit $200 per barrel this winter as demand placed huge pressures on the supply chain for oil! Now, of course, this level may still be reached, but it is highly unlikely with the more likely course being a softening of prices as world demand slows down for oil amidst the current recession conditions being faced around the globe. This example throws up two interesting points:

1. The so called specialist could have lost me a lot of money. So one must start to question how aware these people are and how much of your money they should be controlling. I have huge sympathy for the current plight these people and their families are in, but many people have expressed the view that if they could not see this coming then what were they actually being paid those huge sums for.
2. On a long term basis, the view of the analyst above is probably correct, and if you are a long term investor, then to buy at the current time maybe very profitable in the long run. In fact, I know some major investors who are doing exactly this! It is very difficult to call the bottom of any market, but the supply versus demand curve points to major pressures on supply in the future as demand grows from emerging economies and continued population growth. So a long term investor views the current situation as an opportunity.

So this example highlights not only how any asset class can be affected by the current turmoil, but also how this maybe distorting the long term trend for that class. The truth is, as I have said many times before, that nothing ever moves in straight lines all the time. There are always corrections that set the base level for the next move, and that is where we are now. But the long term investor is not interested in a short term snapshot in isolation, but how to view it from a long term perspective. So we remove fear from the equation and use rational thought to construct a plan for our way ahead.

As a class, property is more secure now than ever, as highlighted by many commentators. However, like all classes, it has been affected by the current conditions and there are some fantastic opportunities that are arising everyday. Now is not the time to go into these opportunities in detail, but location, strength of covenant, and thorough due diligence have never been more important.

Finally, a thought and quote from the greatest private investor ever, Warren Buffett:

‘When all around you are being greedy then be very fearful, but when all around you are being fearful then be very greedy’

As a long term investor, he has followed his words with actions already without trying to predict the bottom of the market – I know I will be doing the same in the near future.