Saturday, March 17, 2007

氣質

It's been a fun few weeks. Volatility has returned to the markets and with volatility comes opportunity. It was a perfect storm of sorts. A significant decline in the Chinese stock market, Alan Greenspan chiming in about the possibility, not probability, of a recession later this year and soft durable good orders. Not to mention troubles brewing in the subprime mortgage sector. Add it all up and before you knew it the Dow Jones Industrials had declined 416 points.

But look deeper and you may find that this was just a healthy correction after many consecutive months of gains. Maybe more declines are in store. That would be just fine with us too. Let's take a look at the various elements which instigated the downdraft.

The collapse of the Chinese stock market that was all but driven by retail investors has literally no impact on the growth of the Chinese economy. For now manufacturing, income growth and creation of jobs are all that matter. The priority for the authorities is to prevent the economy from overheating. In fact, the attempt to drain liquidity from the economy was one cause of the sell-off.

As for Mr. Greenspan, he was quick to qualify his comments by saying that while a recession was possible, it was not probable. Thank you very much.

The troubles in subprime mortgages may have more damaging effects and could spill over to other parts of the economy. The already fragile housing markets may be broadly affected. Or investors' appetite for risk may diminish, spelling doom for the private equity powerhouses relying on the junk bond market to make the math work. Perhaps, but in my opinion unlikely.

If the private equity players, hedge funds and activist investors were giddy before the market's decline, they must be salivating at their prospects now. Surely, the discount to intrinsic value of companies such as Brinks Co. (NYSE: BCO) and Cadbury Schweppes PLC (NYSE: CSG), being pursued by hedge funds and activist investors, has not disappeared over night.

Then there is Carl Icahn's recent bid for WCI Communities Inc. (NYSE: WCI). Who in their right mind would want to buy a homebuilder now? Let's just say Mr. Icahn has done just fine buying up assets when all others have shunned them. If you are not satisfied with Mr. Icahn's track record, you may be interested in what the folks at Goldman Sachs (NYSE: GS) had to say during their recent quarterly conference call. Goldman did not seem worried and proclaimed that "while market conditions will regularly shift, we are confident that our client-driven strategy will continue to produce the strongest results for the firm." Oh by the way, Goldman is ramping up its subprime operations and is on hunt to snap up distressed subprime lenders on the cheap.

If Mr. Icahn and Goldman are not good enough, let me fall back on our most reliable mentor Warren Buffett. In an interview with Liz Claman of CNBC last week, Mr. Buffett rewarded us with his usual wisdom. It's worth a listen. Here are a few excerpts:

"Long term you will do just fine owning American equities. I have no idea what the market will do next week or next month or next year. Zero. I don't think about it and if I thought about it, it would do no good. The main thing an investor needs is the proper temperament. He doesn't need a 150 I.Q. He doesn't need to be an expert in accounting. But he does have to keep his balance when untoward things happen in the market. The reason investors do poorly in the market is they beat themselves. The Dow went from 66 to 11400 over the past century. You would think it would be hard not to do well over that period ... You have to have emotional stability. And if you have emotional stability and stick with American businesses you will do fine."

"I don't think about the economy. It doesn't make any difference to me because I am going to buy a business and be with it forever. I have never in my life not bought something because I thought the economy is going to get poor and I have never bought something I didn't like because I thought the economy was going to be great for a while. We are going to play the game as long as I am alive. There will be mostly good years, there will be a few sensational years and there will be a few terrible years. I can't dance in and out and skip the terrible years."

"[Berkshire's] own businesses right now are pretty good but the residential construction businesses - the carpet business and the bricks business - have headed down in a significant way. But it doesn't make any difference. We are going to be in the carpet and bricks business forever."

Icahn, Goldman and Buffett. All sucessful investors with the proper temperament. In case the bottom falls from under the Chinese markets again, remember the Chinese word for temperament - 氣質.