Tuesday, September 27, 2011

How Cheap is Cheap?

This is an excellent point from the gurufocus interview with Prem Watsa of Fairfax Financial:

Ben Graham was reflecting in the ‘30s and he writes, if you were not bearish, if you're not concerned about the economy in 1925, not in 1927, 28, 29, but in 1925, there was only a 1/100 chance that you survived the depression, because what'd you have looked at was if you were not bearish in 1925, you'd have seen the crash in 1929, drop 50%, and you'd have come right in and thought of it as an opportunity, because the Dow Jones dropped from 400 to 200, went back up to 300, and the second leg after that was a killer, dropping about 90%!! That was a worry, a lot of problems at the time, and I keep thinking of that because the second leg, I have seen in many industries, oil drilling and farm equipment, that second leg can be vicious, and we might well be entering that second stage.

3 comments:

Stagflationary Mark said...

...if you were not bearish in 1925, you'd have seen the crash in 1929, drop 50%, and you'd have come right in and thought of it as an opportunity...

This quote really resonates with me. I turned bearish in 2004, which would be the equivalent of turning bearish in 1925.

I suspect those who turned bearish in 1925 did not see the crash of 1929 as an opportunity any more than I saw the crash in 2008 as an opportunity.

Those who were bullish in 2004 probably do see this environment as a buying opportunity though. Go figure.

I do not. I remain bearish. Excessive debt and leverage turned me bearish in 2004. It still exists.

CP said...

See, exactly. The analogy between the two depressions is profound. We are setting up for a similar wipeout of the prematurely bullish.

And, you are right. All you have to look at is the debt/GDP chart to see that we have done a *miniscule* amount of deleveraging.

P.S. Look at my new copper/treasuries post. You and I seem to think about rates and commodities in a similar, unique way.

Stagflationary Mark said...

CP,

I did read your copper post. It also resonated with me of course, but not like this post did.