Bull Market Baloney and Bear Market Valuations

Strange title eh ? At the risk of sounding silly, the title is supposed to represent my posting on the valuations inherently found within a bull market, versus a bear market. Interestingly, as we have observed currently, the bear market is not even fresh into a year (12 months), yet people seem to be complaining that it's "too long" and everyone is hoping against hope that the bear market will end soon and signal the start of the new bull.

From a personal standpoint, I do not advocate either bull or bear as I focus on companies and the external factors which affect my companies' performance. Still, a bear market always makes it all the more attractive to search for bargains amongst the companies listed on SGX due to the low accorded valuations by Mr. Market. A quick scan I did this weekend turned up many companies (many of them China ones) which were trading at single-digit PER, despite decent prospects for growth. Just 8-10 months ago around August to Oct 2007, the same companies were trading at 20-30x PER. Which brings us back to the topic above - bull markets produce a lot of baloney (nonsense) because everyone bids up the prices of companies to absurd levels, bringing about ridiculous expectations which results in wanton speculation and excessive over-valuation. Of course, the term "irrational exuberance" (coined by Alan Greenspan himself) comes to mind but this term is so oft used it is becoming a cliche in itself.

The purpose of this post (which may look and sound like a Sunday ramble) is to highlight the follies of valuations found in a typical bull market and for the investor to recognize this and refrain from participating in the folly and foolishness. The greater fool game always gets played over and over like a macabre game of musical chairs; the last person without a chair gets left holding the baby at amazingly high valuations. Conversely, in our current market, notice that newspapers, newsletters, commentaries and pundits have expressed dire predictons about the market and economy in general; speaking of "record high oil prices" and a "worldwide recession" looming. Just as in bull markets, there is no end to good news; in bear markets there is always no end to bad, pessimistic news.

For the intelligent investor, he will recognize the advantage of bear markets which makes ALL companies cheap, and will take his time to do his careful research in order to identify potential gems. The bear market is very much welcome by true value investors as the only way to purchase companies with a decent margin of safety and at reasonable valuations. Of course, one must always separate the wheat from the chaff; which is why investing is easy but not simple. Some companies really DO deserve to be trading at low valuations and below NAV as their growth prospects may be unexciting, their industry may be stagnating or costs may be rising significantly. All these factors have to be weighed by the astute investor in order to fulfill a checklist of items which qualify a company for investment selection. Patience is always a virtue and the investor should be willing to wait for a good opportunity to accumulate the shares of a superior company.

Thus, it is better for a bear market to slowly drag itself out so as to maximize the time needed for an investor to hunt for good bargains and to purchase a good company. However, the majority of the folks out there are wishing for the exact opposite; for the bear market to end quickly and for the bull to arrive. All I can say is that these people have probably purchased shares during the bull market baloney period (at high valuations) and cannot bear the pain of cutting their losses; thus they hope for a similar rebound to their previously mentally-anchored price so that they can sell at a smaller loss or breakeven to make themselves look less foolish. The problem with this is that capital can be locked up for extended periods of time without decent returns and the effects may be disastruous as one does not have capital to take full advantage of the bear market. Strangely, the wise thing to do is to just accept the loss and move on; but a quick chat with many associates has revealed that this is one of the HARDEST things to do for an individual and thus many simply cling on forever hoping that the company will recover and to wait for valuations to hit baloney levels again.

In case the patient investor runs low on cash while researching companies to purchase, he can always fall back on the dividend income stream which he has set up by purchasing good companies at low valuations in the past. I would strongly advocate that investors purchase some form of yield stock to provide some cash flows as your capital may be locked in for a very long time. Even Warren Buffett's Washington Post pays him a check equivalent to his entire investment every year ! Now how about that for cash flows ? Thus, the two-prong approach of having cash for investment during a bear market and regular cash inflows from holding good companies purchased some time ago can benefit an investor by allowing him to have some yield as well as opening up opportunities for investment.