This blog post originally appeared on RealMoney Silver on Nov. 23 at 7:46 a.m. EST.
"You only find out who is swimming naked when the tide goes out."
--Warren Buffett, 2001 Berkshire Hathaway Annual Report
Back in December 2006, I
my 25 surprises for this year.
I did the best ever in predicting outlier events, and I will review the outcomes and announce my new 25 Surprises for 2008 in the next two weeks.
The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities -- that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future -- will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There's a problem, though: They are dancing in a room in which the clocks have no hands.
--Warren Buffett, Letter to Berkshire Hathaway shareholders, 2000
In looking at the roller coaster pattern of trading, in a market without memory from day the day, I am reminded of one of my surprises from nearly 12 months ago, which is likely to pan out.
14. A well-known corporate raider finds himself with a concentrated portfolio of illiquid investments and suffers large losses. ESL's Ed Lampert cagily watches the early year private-equity euphoria and does nothing, opting to shore up his liquidity. But as equity prices drop in the second half, he is joined by several previous corporate partners in making a large acquisition in the entertainment/media field by year-end.
Not only are hedge funds
with regularity but a number of activist corporate raiders are in deep doo-doo. That also applies to a number of activist-oriented hedge funds, and even to many traditional hedge fund managers that traffic in concentrated investment positions.
I have expected the disintermediation (outflows of funds) in the hedge fund industry for several months now, and that scenario is clearly working out. Hedge fund withdrawals and redemptions combined with eroding performance are probably the causes of the late-day swoons we have experienced in the last two weeks or so.
Speaking of Warren Buffett, I suspect he is getting his shopping list out now -- even well before Christmas. While he probably doesn't yet feel like "an oversexed guy in a whorehouse," I suspect he is starting to consider that we are close to a "time to invest and get rich" (October 1974 interview in
Stated simply, Warren Buffett is now probably licking his chops -- "I'd be a bum on the street with a tin cup if the markets were always efficient" -- especially considering the developing opportunities in the carnage and ruin in what we stock market investors call the financial sector.
At the time of publication, Kass and/or his funds had no positions in the stocks mentioned, although holdings can change at any time.
Doug Kass is founder and president of Seabreeze Partners Management, Inc., and the general partner and investment manager of Seabreeze Partners Short LP and Seabreeze Partners Short Offshore Fund, Ltd.