I recently saw a very famous money manager speak at an investment conference. He was lamenting the current rosy market environment. The stock market is within 1% of its 2007 high. The Dow and S&P 500 have had one of their strongest performances in January of all-time, up 6.1% and 6.9% YTD respectively. Bond yields remain near zero. This manager quoted Jeremy Grantham from his October 13, 2008 interview with Barron’s. When asked, Do you think we will learn anything from all of this turmoil?” Grantham replied, “We will learn an enormous amount in a very short time, quite a bit in the medium term and absolutely nothing in the long term.“ This famous money manager then observed, “Little did we know that long term was about two and half years.”
Interestingly, Warren Buffett published his Op-Ed piece,”Buy American. I Am.” in the New York Times on October 16, 2008, only 3 days after Jeremy Grantham’s comments. He wrote, “A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors.” He was early, but he was right.
The crucial question in 2013 is where are the markets and where are they going? There is not much fear out in the markets at this point. Yes, there is widespread lament at government spending and entitlement programs. However, more specific danger signs are already on the horizon. Massive and gigantic venture capital start-up valuations are back again. $100 million apartments are being purchased in New York and London once more. Housing prices are on their way back up. As of this writing, the largest potential private equity transaction since 2007 is due to be announced, imminently.
The markets are up over 20 percent from their November 2012 lows. When market upturns are widespread and persist, they lull people into a false sense of security. As Seth Klarman has observed, “Nowhere does it say that investors should strive to make every last dollar of potential profit; consideration of risk must never take a backseat to return.” He goes on: “Risk is not inherent in an investment; it is always relative to the price paid. Uncertainty is not the same as risk. Indeed, when great uncertainty— such as in the fall of 2008— drives securities prices to especially low levels they often become less risky investments.”
If one were to seek the least attractive, least desirable area of investing in the entire world at this moment, it would be hard to say. The current answer is probably “nothing.” Everything is back in favor again. These are ebullient times.