Portfolio manager’s Letter September 2004
August has been an interesting month, with all sorts of things for the market to worry about: terrorist threats at the Olympics, the Republican convention, skyrocketing oil prices, and hurricanes Charlie Munger and Francis. The market made a new low for the year at mid-month, but recovered at the end of the month to show a small gain. For those of you that follow my ramblings, you know that my guess for next year is negative — that I believe that the market eventually will test and maybe break the lows that were established in 2002.
I feel this way because the excesses of our recent tech bubble were so extreme that one three-year bear market is simply not enough to cleanse Mr. Market’s soul of his predilection to party on. It is possible that the recent weakness is the start of a prolonged decline and in a sense maybe I hope that it is.
If further excess correction is necessary, then let’s get on with it, and get it over with, because we all know that at the end of the long painful road down is the end of the rainbow. With the pot of gold being a market that morphs Mr. Warren Buffett back into an over-sexed teenager. The market, in short, where we can take five to ten of our twenty punches and go to the movies for fifteen years.
But as much as I would like to believe that the correction has begun, there are a couple of things that bother me. Specifically there is all this bad news. Good bear markets do not start with bad news — they start when the news is good and everyone is happy, and end when the news is really bad. Sentiment indicators in August were at levels that we are more likely to see at short-term bottoms.
Some value oriented mutual funds are sitting on large cash positions, and my guess is that hedge funds not only are sitting on cash but, also have big short positions. These are conditions that we are not likely to see as the market is teetering on the edge of the cliff. So, Jeremy Grantham said in April “Lord make me prudent, but not yet”.
Investor sentiment has become so bearish that it tends to make me more optimistic about the rest of this year. I think it still possible that 2004 will turn out to be an up year, particularly if Georgie Bush is able to rally and beat out those nasty old, capital-gains-tax raising Democrats. None of this changes my long term view. And whether the bear appears before or not till after the election, it is not at all clear to me why anyone would want to be president for the next three or four years.