A Snapshot of Where We Are Today
Hodges Capital Management
By Don Hodges
January 5, 2012
And now “Breaking News!” That’s a sound we hear repeated over and over again on a daily basis. Taking a clue from such news, high frequency mathematically modeled computers react quickly in split seconds to grab a few cents a share on heavy volume. The computers are programmed to recognize events occurring in the markets and respond quickly. Extreme volatility is set in motion. Response begets response, which begets additional response, which begets further response and the radical decline is underway. On any given day, maybe 92% of the stocks will decline in price as the snowball gathers momentum. This scenario may last a day or a few days back to back. At some point the market is oversold and a similar stampede begins in the opposite directions and perhaps 92% of the stocks rise.
What does this have to do with investing based on underlying value or projected growth? Nothing! Call it what it is – a blend of technology and speculation that is disrupting markets and driving serious “investors” away. In the long run is this healthy for people’s capitalism and stock ownership? You make your own decision. I can only tell you that many people are making their decision, withdrawing and backing away in frustration. The New York Stock Exchange is now a profit-making enterprise and true to Wall Street’s propensity to “look the other way,” we can expect no protest there as the volume is productive and profitable for that institution.
Maybe I’m missing something here and am being overly pessimistic. However, I don’t think so. Granted, looking across the valley there are opportunities for the long-term investor. It takes vision and discipline to step up and invest under such conditions. Many stocks, based on price earnings multiples and dividend yields, appear as cheap and attractive as they’ve been in 37 years (1974).
History has shown time and again, cycles like this one where the news is overwhelmingly bad, is a great time to make investments for the long-term. It’s seed planting time. But it is not an easy thing to do. The gravitational pull because of our emotions, is to hide and do nothing, to defer until “things look better.” In the past, turnarounds are generally up a substantial amount from their lows before it is widely acknowledged that the turn is for real. If the past is reliable, based on the length of this decline, when the turnaround does occur, it will more than likely be swift and dramatic.
Here at Hodges Capital Management, we get excited at a times like this and work harder than ever because we instinctively know that when everything is off in price, there are companies that are under priced. In other words, they are worth more on a long-term basis than the price at which they are trading. They’ve declined in price in tandem with other stocks, as well as the market in general.
Our approach to researching and investing is to be company focused. After all, we are not investing in the “market.” We are investing in specific companies that appear to be compelling investments for one reason or another. They don’t all fit the same model, but from our vantage point and, in our opinion based on our focused research, we view them as long term opportunities.
Like the parable of the planting of the seed, some come up fairly quickly; some take a while; and frankly some may not come up at all. But plant we must if we are going to be true to our calling. If we do nothing, we reap nothing. The odds are in our favor right now and to quote Barton Biggs, “don’t overlook human intervention.”
Harking back to Economics 101, day to day wealth is created by businesses. As wealth is produced by earnings and as Gross National Product grows, the value of most assets increases; land, commodities, etc… But it all starts with the generation of profits – the creation of wealth.
As long as we have economic freedom in this country, entrepreneurs and capitalistic opportunists will strive, succeed and create wealth. I hope the average American investor will take the long-term view and not opt out of this dynamic process. But instead will look across the valley at the sunny side of the mountain.
(c) Hodges Capital Management
