As nearly everyone knows, the last few months have generally been less kind to the investor than the previous two dozen or so months. For those who overinvested in the so-called "TMT" world, or Technology/Media/Telecom, that is a gross understatement. And contrary to the belief of one particularly misguided but well-read CEO, quoting Greek dramatists such as Aeschylus ("the reward of suffering is experience") doesn't ease the pain.
Which brings up a point that seems obvious to reasonably regular readers of this space: If something can't go on forever, it won't. Not all start-ups are worth $7 billion in their first three months of existence; putting an "e" in front of a corporate moniker does not a guarantee a future with your own private island; and the reality of what it really takes to justify price/earnings multiples of 100 or more must be depressing to people who have only recently taken the time to consider the implication.
Here's our new favorite quote from a friend in the TMT world: "Profitability has gone from a curse word to a code word to a survival word ... and we have a month to get there since the money dried up overnight."
Which brings up our really big thought. In the past few months, we have seen a number of articles proposing that the economy might not really be affected by a serious downturn in the stock market or a collapse in the bleeding-edge world. Let us state this simply: That is so
that our hands shake with intellectual vehemence as we type this. Fortunately, we recently came across several versions of a chart that illustrate this point so well, we no longer need another 2,500 words of analysis.
Retail Store Sales
Sources: Nasdaq, Bureau of the Census
There is not an area of the economy or a geographic area of this country where someone can look around and say with a straight face that they cannot see the influence of the enormous creation of wealth derived from stock market gains. We have noted many times the "virtuous" cycle of a strong economy, strong corporate earnings, strong stock prices, strong consumer spending, strong real estate market, strong IPO market, etc., and it is impossible to pick the one element from which it began. But make no mistake: They are linked at the hip.
But that link has been brutally severed and
be coming back for the foreseeable future. Journalists and money managers have wasted hours pondering what "event" would derail the illusion that stocks in general and TMT in particular are wealth-guaranteeing manna raining on us from above. Sometimes there is a cathartic event -- the
, for example -- but this time, as is true of so many of these cases, it is simply a matter of libido destruction.
So Much for Animal Spirits
The "animal spirits" that were built over wildly successful and successive IPOs and daytrades have been devoured by a recent string of successive failures. Whether you are a professional or a daytrading spouse on a lunch hour, if you've been gonged in your last four investments or trades, you are going to be a lot more careful and suspicious of the next new thing that is being pitched to you. And this cycles downward as easily as upward: It just happens.
I'm paid to take some lumps and come back the next day and contrary to some popular beliefs, it is specifically the fact that it is
other people's money
that makes me more cautious and more value-oriented. Judging from
volumes, I would bet there is an awful lot of soul searching going on around America's dinner tables, complete with canceled vacations, dropped housing bids, etc. The same goes for the corporate dining room.
So we sit here and think: We have 8 3/4% fixed mortgage rates, an inverted yield curve, the
raising interest rates in 50 basis-point increments, the Nasdaq down 40%, while the most attractively priced stocks in the past six months -- the boring old "food and finance" sectors -- are suddenly outperforming in a big way.
The conundrum is we continue to find a lot of inexpensive stocks that have been in their own personal bear market for several years now.
The economy is slowing down. The pendulum is swinging, and there is not a great deal of historical support for the hope that it stops somewhere in the middle, as opposed to swinging the other way.
The conundrum is that we continue to find a lot of inexpensive stocks that have been in their own personal bear market for several years now. It has been our experience that ignoring the headlines and buying what we like at prices we like makes money for our clients, and keeps emotionalism at bay. This seems to augur for continuing outperformance by last-year's doggies: foods, some financials and a whole host of "steady eddies," whose consistent low double-digit returns seemed ridiculously old-fashioned.
Our risk is that the mess takes the rest of us down with it. It is much better for our clients -- and frankly more satisfying for us -- to be up 20% in absolute terms and not get worried that some technology fund is up 412%, than to be up 5% while the technology fund is down 41%. Nonetheless, we'll take that risk.
Jeffrey Bronchick is chief investment officer of Reed Conner & Birdwell, a Los Angeles-based money management firm with $1.2 billion of assets under management for institutions and taxable individuals. Bronchick also manages the RCB Small Cap Fund. At time of publication, neither Bronchick nor RCB held positions in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Bronchick appreciates your feedback at