Wally Weitz shareholder letter: The bear market is in full swing and investor panic is spreading to nearly all parts of the stock and bond markets. The sense of fear and hopelessness among investors reminds me of 1974 when the Dow Industrials fell from over 1,000 to under 600.
In that bear market, the first "oil shock" (OPEC asserted itself and oil prices rose from $3 to $10) and fears of recession and inflation—"stagflation"—led both individual and institutional investors to give up on stocks. Much of the bad news was real, and many businesses had depressed earnings for a while, but the selling of stocks "over-shot" logical price levels by a wide margin. Once the market bottomed in December 1974, it rose back to 1,000 within 15 months, a gain of 75% off the bottom.
The "credit crisis" that began in 2007 and triggered the current bear market is particularly unnerving because a number of large, well-known financial institutions are experiencing severe credit and liquidity problems. The unprecedented decline in home prices has raised questions about the value of mortgage collateral. The complexity of asset-backed securities and the absence of a trading market for these securities have made it impossible to assess the strength of the balance sheets of many institutions. Fear of the unknown has led to heavy selling.
Now the distress in financial markets is spilling over into the rest of the economy. Earnings estimates are being lowered. Unemployment is rising. Energy, agriculture, and other commodity-related stocks which until recently were islands of strength, are showing signs of weakness. When investors give up on equities in general and speculators are forced to sell because they can no longer borrow to hold their positions, stocks can fall well below their intrinsic values. We believe this is happening now and that it is creating good opportunities for value investors.
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In that bear market, the first "oil shock" (OPEC asserted itself and oil prices rose from $3 to $10) and fears of recession and inflation—"stagflation"—led both individual and institutional investors to give up on stocks. Much of the bad news was real, and many businesses had depressed earnings for a while, but the selling of stocks "over-shot" logical price levels by a wide margin. Once the market bottomed in December 1974, it rose back to 1,000 within 15 months, a gain of 75% off the bottom.
The "credit crisis" that began in 2007 and triggered the current bear market is particularly unnerving because a number of large, well-known financial institutions are experiencing severe credit and liquidity problems. The unprecedented decline in home prices has raised questions about the value of mortgage collateral. The complexity of asset-backed securities and the absence of a trading market for these securities have made it impossible to assess the strength of the balance sheets of many institutions. Fear of the unknown has led to heavy selling.
Now the distress in financial markets is spilling over into the rest of the economy. Earnings estimates are being lowered. Unemployment is rising. Energy, agriculture, and other commodity-related stocks which until recently were islands of strength, are showing signs of weakness. When investors give up on equities in general and speculators are forced to sell because they can no longer borrow to hold their positions, stocks can fall well below their intrinsic values. We believe this is happening now and that it is creating good opportunities for value investors.
Read the complete commentary
