Graham and Doddsville Newsletter - Winter 2009
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Excerpt (Thanks Linc!):
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Berkowitz: The amazing thing is that people just don’t seem to learn from history. Difficult times correct problems. Companies are tightening up, losing the fat, becoming more efficient, learning very tough lessons about leverage, and relearning about the sanctity of the balance sheet. They are learning that you should not play Russian roulette even if the gun may have a thousand chambers and only one bullet because if you hit that bullet, you are dead. Much of the probability and statistics work—for instance, Monte Carlo simulations—are based upon thousands and thousands of spins of the wheel. But if you kill yourself that one time, you can’t spin again. I don’t know where that is addressed in the statistical courses. Now we know it. Now we have books about black swans and fat tails, and we understand that a bad thing can happen more often than you think.
In life as in investing, what kills you is what you don’t know about and what you’re not thinking about. Today investors are focused on most of the ways in which you can die, which is a great signal for the future. It is when you’re not thinking about it that you get hurt. It is when you pay that optimistic price. It has always paid to be very greedy when everybody else is quite fearful of the environment, because that fear factor is priced in. You tend to get a relatively decent margin of safety based on the price you are paying for a given level of free cash flow. That is where we are today. What better time is there? If not now, when? Was it a better time to invest three years ago? Six years ago? And the answer is no. What is happening today, as in most bear markets, is that people either don’t have the cash or they don’t have the stomach—hence the low valuations. -
