In his recently-published 2008 annual report, award-winning money manager Francis Chou quotes an unhappy investor who suggested the poor performance of the Chou funds was due to "premature accumulation".
Mr. Chou, who has always accepted full responsibility for bad results, agreed. "We purchased some stocks at prices that, in hindsight, were too high," he frankly admits. "The ensuing economic crisis, credit freeze and deleveraging severely impacted the intrinsic values of some of the stocks we purchased...As a consequence, we suffered a permanent loss of capital investing in those companies."
The powerful rally we've seen in the stock markets in recent weeks leaves me wondering if this isn't another example of "premature accumulation", albeit on a much larger scale. As of Friday's close, the S&P/TSX Composite Index was up 21% from its intra-day low for 2009 of 7,480, touched on March 6. In New York, the Dow was up more than 23% and the S&P 500 was ahead by 26%. Those are powerful moves. A lot of people have been doing a lot of buying.
So have they been guilty of premature accumulation? I think the answer is yes. Despite all the smiles and handshakes at the G20 meeting in London and the promises of a new global economic order, the fact remains that in the real world things are still in a mess. The latest U.S. unemployment numbers, which pushed the jobless rate to 8.5%, served as a grim reminder of how far we have to go before things turn around.
World leaders, including our own Stephen Harper, went out of their way to dampen hopes for a quick turnaround at their closing press conferences in London. So they should. It now looks as though the recession will continue at least until the end of 2009 and possibly into 2010. The stock markets may be leading indicators, but they don't lead by a year or more. I believe what we are experiencing is a classic bear market rally.
Yes, there are signs that the situation may be stabilizing, as contributing editor Irwin Michael points out in his column elsewhere in this issue. But the stabilization is taking place at a very low point in economic terms. What the politicians are telling us, behind the smiles, is that they are hopeful the rate of GDP contraction will not get worse. As for growth, that's a long way off.
There is certainly more bad news to come. Despite the terrific results posted by Research in Motion last week, most first-quarter earnings reports are going to make for depressing reading. Unemployment rates will continue to rise, as more companies downsize. More U.S. bank failures and/or nationalizations are likely.
One area to watch closely is world trade. The G20 leaders made a big issue of the importance of combating protectionism but the reality is that many governments, most especially the U.S., are succumbing to political pressures to pass measures that theoretically will protect domestic jobs. International trade has already seized up (China's exports have fallen dramatically). If that pattern continues, another depression building block will be cemented into place.
I agree with Irwin that we are going to see continued volatility in the markets for the next several months. That means more triple-digit days, up and down, which will fray investors' nerves. Active traders love markets like this, where they can make big profits in a few days (assuming they make the right calls). But for most people who are trying to save for retirement, or a new home, or their children's education, it's a nightmare. No wonder many Canadians have retreated to GICs, despite their low yields.
My advice to readers who want to retain some stock market exposure is to avoid buying during these strong rebounds except in cases where the share price has not moved up significantly. Otherwise, identify companies you want to own for the long term and then wait for the next inevitable correction. Start to gradually build positions on the downturns, but only make small commitments each time.
Remember Francis Chou's experience: stocks that look like great values today may be even cheaper tomorrow as the world continues to reprice risk and intrinsic values are eroded. So don't fall into the premature accumulation trap. It cost Mr. Chou and his clients a lot of money. Not only did his funds plunge in value but he took a personal hit by returning a big chunk of his management fees because of the poor results. He felt it was the fair thing to do for his investors. The fund industry as a whole would do well to follow his example.
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Mr. Chou, who has always accepted full responsibility for bad results, agreed. "We purchased some stocks at prices that, in hindsight, were too high," he frankly admits. "The ensuing economic crisis, credit freeze and deleveraging severely impacted the intrinsic values of some of the stocks we purchased...As a consequence, we suffered a permanent loss of capital investing in those companies."
The powerful rally we've seen in the stock markets in recent weeks leaves me wondering if this isn't another example of "premature accumulation", albeit on a much larger scale. As of Friday's close, the S&P/TSX Composite Index was up 21% from its intra-day low for 2009 of 7,480, touched on March 6. In New York, the Dow was up more than 23% and the S&P 500 was ahead by 26%. Those are powerful moves. A lot of people have been doing a lot of buying.
So have they been guilty of premature accumulation? I think the answer is yes. Despite all the smiles and handshakes at the G20 meeting in London and the promises of a new global economic order, the fact remains that in the real world things are still in a mess. The latest U.S. unemployment numbers, which pushed the jobless rate to 8.5%, served as a grim reminder of how far we have to go before things turn around.
World leaders, including our own Stephen Harper, went out of their way to dampen hopes for a quick turnaround at their closing press conferences in London. So they should. It now looks as though the recession will continue at least until the end of 2009 and possibly into 2010. The stock markets may be leading indicators, but they don't lead by a year or more. I believe what we are experiencing is a classic bear market rally.
Yes, there are signs that the situation may be stabilizing, as contributing editor Irwin Michael points out in his column elsewhere in this issue. But the stabilization is taking place at a very low point in economic terms. What the politicians are telling us, behind the smiles, is that they are hopeful the rate of GDP contraction will not get worse. As for growth, that's a long way off.
There is certainly more bad news to come. Despite the terrific results posted by Research in Motion last week, most first-quarter earnings reports are going to make for depressing reading. Unemployment rates will continue to rise, as more companies downsize. More U.S. bank failures and/or nationalizations are likely.
One area to watch closely is world trade. The G20 leaders made a big issue of the importance of combating protectionism but the reality is that many governments, most especially the U.S., are succumbing to political pressures to pass measures that theoretically will protect domestic jobs. International trade has already seized up (China's exports have fallen dramatically). If that pattern continues, another depression building block will be cemented into place.
I agree with Irwin that we are going to see continued volatility in the markets for the next several months. That means more triple-digit days, up and down, which will fray investors' nerves. Active traders love markets like this, where they can make big profits in a few days (assuming they make the right calls). But for most people who are trying to save for retirement, or a new home, or their children's education, it's a nightmare. No wonder many Canadians have retreated to GICs, despite their low yields.
My advice to readers who want to retain some stock market exposure is to avoid buying during these strong rebounds except in cases where the share price has not moved up significantly. Otherwise, identify companies you want to own for the long term and then wait for the next inevitable correction. Start to gradually build positions on the downturns, but only make small commitments each time.
Remember Francis Chou's experience: stocks that look like great values today may be even cheaper tomorrow as the world continues to reprice risk and intrinsic values are eroded. So don't fall into the premature accumulation trap. It cost Mr. Chou and his clients a lot of money. Not only did his funds plunge in value but he took a personal hit by returning a big chunk of his management fees because of the poor results. He felt it was the fair thing to do for his investors. The fund industry as a whole would do well to follow his example.
Also check out:
