Has Fear Blinded Investors to Value

(This article first appeared on The Div Net on March 14, 2009)

Simoleon Sense brought to attention an article on the Wall Street Journal that I found interesting.

Should shares in Kraft Foods really be so low they have a dividend yield of about 5 ½%? What about A T & T (7%)? Or DuPont (9 ½%), Altria (8%), American Electric Power (6%), British Petroleum (9 ½%), drinks giant Diageo (5%) cellular network giant Vodafone (8.5%), Merck (6 ½%) or a host of many others?

You be the judge. These are not individual stock tips. You need to do your own homework. And of course dividends can be cut. If business keeps getting worse many will be, right across the market.

But these are, on the whole, pretty solid companies. They are not financials. You’d expect their businesses to hold up pretty well in almost any circumstance except the end of the world. Any one or two companies can get into difficulty, of course, but it would remarkable indeed if they all fared badly.

The “efficient market hypothesis” used to claim that, when it came to the stock market, “the price was always right” – in other words if, say, “Jellyfishforpets.com, Inc.” was trading at $180 a share, then by golly, that’s what it should be trading at, and who could possibly say it was overvalued?

As I read this article, I couldn’t help but agree how efficient market theory is dead. It also led me to wonder how Universities will change their course material. If 2008-2009 doesn’t prove that efficient market theory is rubbish, then I don’t know what does.

There is a continual fear that the Dow could drop another 50% to the 3000 level, but if you remain in the game, stand your ground and wait it out, then the rewards could be enormous. If the market completely implodes and the US and global economy goes with it, then our money would be worth less (or worthless) anyways.

As I continue to search for the screaming bargains that jump out, it’s difficult to ignore where the market is and how bad my portfolio is doing, but then again, anything that is profitable cannot be comfortable.

  • With the recent rally, we’ll find out sooner or later whether it is a bear market rally. My feeling is that the rally is unjustified. Banks may have come out and stated that they wont need additional funding, but seriously, could they have turned their business around miraculously in 1 quarter?

  • Hi Jae Jun, just a quick note on universities adjusting their course material to account for inefficient markets. Try prof Shiller’s course at Yale (all online). He portrays emh as a half truth: http://oyc.yale.edu/economics/financial-markets/

    Richard Beddard’s last blog post..Saving capitalism from the capitalists

  • MKL

    My thought is that even if one individual bank turned their business around they are still in an industry which is in tremendous turmoil, which leaves uncertain the behavior of any. Then, once some surprising behavior takes effect, the ripples are unknown til their upon us. Collectively, this is an obvious dilemma. The financial world is lacking confidence to operate with any certainty.

    Simultaneously, “confidence” is often seen as a state of mind. It is said that confidence breeds confidence. It is said “act with confidence and you will feel confident.” This of course is on an interpersonal level, but is now being extrapolated onto a whole financial system. (Or should I say exTARPolated?)

    Genuine confidence comes from knowing, from certainty. Genuine banking confidence, and trust, comes from knowing that if you make one hundred loans under certain conditions (% down, dependable income, mortgage being certain percent of said income, etc) that MOST people will pay those mortgages reliably. Some will default because they’re bums. Some will default through no fault of being a bum, but of some bum thing happening to them from which they will recover. Most will make their payments. This is the banks’ income.

    When you start to get clever, and want to beat the system by a little bit, prove you’re a little smarter, then you start to hedge your bets.

    In this situation, ACTING confident might intend to breed confidence, but it does nothing for the NOT KNOWING. And there is too much NOT KNOWN at this point.

    It was telling to have the paterfamilias of the banking system come out and made speeches to instill confidence in their publics. On the one hand, it WAS reassuring to be reassured. On another hand it is not.

    They are the ones who KNOW the unknowns they will never reveal. They are also the ones who know how much they DO NOT KNOW. Like Godfathers, they also know that the public does not really WANT to know all that goes on behind closed doors. AIG had to reveal counterparties. UBS had to obey swiss law and NOT reveal clientele, and now swiss law has been bent and UBS has to reveal clientele, as will probably now other swiss banks.

    Do those dons really now know what will happen to the money that is no longer safe in swiss privacy? Because that money will find a way to hide itself. Just as simplefolk have long hidden money in mattresses or in coffee cans buried in the backyard, more sophisticated folks with access to more sophisticated means have needed more sophisticated means of coffering their cash. As do corporations, and whole countries.

    Someone will protect it, for the right price. Who? Of those who have been protecting (and hedging and growing these huge coffers) who will be able to keep on doing it? Of the handshaking backroom relationships where one knows vaguely at least what the other is doing, which relationships will be honored? Which don will be the next to fall? Who trusts whom? About what?

    James Cayne (Bear Sterns), Richard Fuld (Lehman), down they went in shame. Who did Vikram Pandit replace? Pandit is doing his best to maintain favor, comply with those who seem to be the powers-that-be. John Thain is surely out of favor in the public eye. Who would dare risk their p.r. by supporting him? Did the CEO of Wells Fargo just call the stress test and the TARP asinine? How long will he be in favor if that’s how he intends to show how well he can play with this group?

    There is too much uncertainty. But what is certain right now is that some group intends to safeguard the means of keeping money flowing. It will be somewhat related to how things worked before. It will be somewhat new. Eventually it will settle into a familiar, somewhat predictable “way that it works”. It will be known. Not the details, but the dependability of the system will be known.

    Until then, until the dons have confidence, the public cannot.

  • @ Richard Beddard,
    Thanks for the link. I would jump at the chance to take one of Robert Shiller’s classes.. only problem is getting into Yale.. I wonder if anyone can take the online course.

    @ MKL
    Great comment. Until the Wall Streeters have confidence, public will not. Only problem is that their fear and confidence levels are constantly overblown. Their confidence level has skyrocketed of late but as you have mentioned, the unknowns still remain to be known.

    Only time will tell.

  • I totally agree with the idea that confidence leads to more confidence – of course, this is true whether the confidence is warranted or falsely manufactured. Lately, though, the general call throughout the media has been one of constant doom and gloom, so it offers the average person nothing but iron-clad insurance that the sky is actually falling. When fear is actively being generated, it does the same thing as confidence… it replicates itself.

Ready to try Old School Value?