Update - March 2nd at 11:00 A.M.
Well February was an "interesting" month and the worst month in the market since 1933. In fact much of what has happened in the last 18 months in the marketplace for all assets has a strong resemblance to the earlier devastating years of the Great Depression. Stocks in general have declined well over 50% and many stocks have lost 75% of their value in a remarkably short period of time. The residential real estate markets have been devastated in some areas (California, Florida, Nevada) and in other areas the pain, thus far, has been less but, significantly, I believe these areas have more pain in their future (New England, New York). The Commercial real estate market is starting to implode and this will be a significant story in 2009-2010. The banking system is in total disarray and there is considerable concern abut the effects, in the longer term, of the massive deficits. Even Warren Buffett's company has lost close to half its value in the last year.
The problems in the world are no less severe. Iceland and Latvia have essentially entered bankruptcy and it seems likely that a number of other countries will follow unless they are rescued (the countries in danger are mostly in Europe and their VERY reluctant savior is the EU). Japan is, once again, sinking into a deflationary mess.
In fact everywhere we turn there is trouble, bad news and panic.
So, of course, we are finally starting to add to our stock, energy and real estate portfolios. ? The additions have been significant in the last week and I would expect to continue to add to our positions if prices show further declines. These are, of course, not random purchases, but rather targeted to give us the best opportunity to earn excess profits in the years ahead. Years that are full of uncertainty and totally unpredictable outcomes.
Our purchases all use our basic value methodology, although this is not a value discipline applied in a very narrow sense, which tripped up many of our peers last year with their concentrations in "cheap" financial stocks (e.g. AIG, Citibank, Fannie Mae, Bear Stearns, Lehman, Washington Mutual, etc.). It is, however, value in the classic sense i.e. purchasing assets at cheap prices with strong finances and significant margins of safety.
The characteristics of the portfolio are that it is predominately of very high quality (strength to withstand the worst of times) and it is selling at valuations that offer a very good risk/reward payoff. They are in aggregate paying dividends of 6.1% p.a. and the dividends are, in the main, secure. Financial and retail stocks are a VERY small part of the portfolio and that is likely to remain for the foreseeable future.
As you may remember, I am sometimes early when I start to pick up bargains and I am certainly usually early when I spy danger. I expect the market turmoil to persist and I also expect that we will probably suffer losses on paper that could conceivably push us above -10% on a temporary basis. I am not at all concerned about that and I am starting to get quite excited about a number of very interesting areas that offer really interesting opportunities. Land in Florida and California, after the debacle, now looks interesting for a longer term investment. Blue chip stocks look more and more interesting as each day passes and there is a lot of money to be made in the next few years in distressed debt.
I realize that investing when the blood is flowing in the streets is always difficult to stomach. Please call with any questions that you may have.
We are busy, but calm.