The idea of faith, the word itself, has been effervescing in my consciousness lately, bubbling up from a source I can't identify. I doubt very much that I'm hearing voices. I think instead that it is a manifestation of a not entirely conscious attempt to make some sense of the confusion following Sept. 11. I'll bet there is a lot of that going around.
What follows is an attempt to justify, to myself if to no one else, my feeling that this is a good time to start taking on some investment risk. It is partially a function of the price levels reached in shocked reaction to Sept. 11, or more precisely, the manner in which these levels were reached. It is a function of the spike in uncertainty and the plunge in sentiment. It incorporates the fact that there is a mountainous pile of dry powder stockpiled in money market accounts and a crusade-like commitment to stimulus on the part of the
, Congress and the Bush administration. But a good bit of my justification would have to be labeled as faith.
Faith is an elusive concept but a powerful one.
The Dallas Morning News
reported that an Arabic-language tract of rituals and prayers, offering spiritual instruction for a suicide mission, was found in the wreckage of United Airlines Flight 93 in the Pennsylvania countryside. The motives of the perpetrators of the Sept. 11 atrocities are said to have included some sort of perverted faith in a paradise for "martyrs," but I'm inclined to see it as simply ignorant, psychotic hatred. Whatever the motivation, it was clearly a powerful one to compel such acts.
Faith is not often invoked in market analysis. The term "leap of faith," however, is heard frequently, often at least partially in jest since it connotes an impetuous act. Fiduciary responsibility and faith seem at first glance to be unnatural partners, so we prefer to rely instead on hard-headed logic, on painstaking analyses of assets and liabilities, of earnings projections and discount rates, of comparable securities and competitive asset classes. Dig deeply enough, think clearly enough, and perhaps we can find "intrinsic" value.
That strikes me as an act of faith right there. Take a typical valuation model as a distillation of how to think critically about the stock market or a particular equity. A careful sharp pencil projection of future earnings is discounted by a well-chosen interest rate and the result is compared to the current market price to produce a judgment about the degree of under- or overvaluation in that market price. Undervalued stocks are better investments than overvalued ones, or so goes the implicit presumption. The fact that market analysts have not proven to be particularly good at projecting future earnings -- the 2001 evidence in this regard is particularly pronounced -- or choosing discount rates does not deny that this is a logical way to think about market values. It does suggest, however, that we shouldn't overinvest credibility in the results of this work.
Given all the variability that lies latent in the future, all the unknown unknowns such as Sept. 11, an equity risk premium, an "all else" sort of Kentucky windage adjustment, is often included in these analyses. This is particularly appropriate when comparing projected equity returns with historically less volatile investments, such as bonds and cash. Just how big this slippage factor ought to be is a matter of debate, but it is art, not science. Who had Sept. 11, or anything like it, in his model?
It All Comes Down to Faith
So ultimately it gets back to faith after all, even for hard-headed analysts. Faith in the quality of our projections. Faith in the comprehensiveness of our systems and our discipline. Faith that the meteor strikes and alien invasions that are not in our models
be in our models. Sept. 11 was, and is, a challenge to that faith.
Given the market forces now coming into alignment -- lower prices, deeper bearishness, growing piles of idle cash, coordinated policies designed to stimulate -- it seems to me we need only a catalyst to set off a meaningful rally. That catalyst might be something like an emergent faith that the U.S. and 21st Century civilization generally will prevail against the sort of hatred manifest on Sept. 11.
Here are some questions that I think are relevant but that I can't answer categorically. Will we prevail? How long will it take? What will be the cost in terms of lives and treasure? What is the likely nature of the global economy -- more united, or less? -- that will follow?
The scale of these atrocities has banished ambivalence. The cold fury of the American electorate says to me we will prevail, whatever the cost. The convergence of sympathy and
says that former foes may be future allies in more than just the war on this sort of criminality. But each investor needs to address these issues in his or her own way to decide whether this is the right time for a leap of faith. It's kind of corny and there is no explicit place for it in the typical market "model", but faith in the future of the country is clearly an argument in the market outlook right now.
Six months ago, as the market was making the lows that have since been breached in September, I raised the issue, in a piece titled
Epistemology 101, of what we know vs. what we believe. Back then I knew, or thought I knew, that events such as those of Sept. 11 were the stuff only of paperback thrillers and sci-fi movies. Turns out my implicit risk premium was set ridiculously low.
But now, with all the adjustments that have taken place in the past two weeks -- in market prices and implicit risk premiums, in security systems, in political resolve -- this strikes me as a propitious time to get back on airplanes, for one thing, and put money back to work, for another.
Jim Griffin is the chief strategist at Hartford, Conn.-based Aeltus Investment Management, which manages institutional investment accounts and acts as adviser to the Aetna Mutual Funds. His commentary on the financial markets is based upon information thought to be reliable and is not meant as investment advice. While Griffin cannot provide investment advice or recommendations, he invites you to send comments on his column to