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July 9, 2008
As The Mamas and the Papas sang 43 years ago, “all the
leaves are brown and the sky is grey.” Instead of California
Dreamin’, investors are longing for a nice recovery for
stocks because prices continued to fall in the second quarter.
The Dow had the worst first half of the year performance in 38
years and declined three consecutive quarters for the first time
in 30 years. June was the worst June for stock prices in 78 years.
The downturn was felt around the globe. Japanese stocks fell twelve
days in a row for the first time in 34 years. After soaring 450%
from 2004-2007, stock prices in China are down over 50%. In tough
times, the resolve of every investor is tested. Investors own
stocks for one main reason: results over long periods of time
exceed those from owning bonds.Unfortunately, part of the deal
is that to achieve higher long-term results, the market on occasion
will deliver a punch to the stomach. While stock prices are declining,
investors adopt one of two mindsets. The first is to flee the
scene. Selling brings temporary relief. The bleeding has stopped.
However, those who sell, seldom return, in spite of best intentions
to do so. The reason for this is that before the world appears
to be improving, stock prices will already have moved higher and
the seller is too late to return to the table. The second position
taken by investors is that they do very little. They have seen
ups and downs in the market and know that this too will pass.
This investor will do some opportunistic buying, very little selling
and generally stay the course.
At Lafayette we tend to be in the second category of investor.
We don’t jump in and out of the market. We focus on the
long-term prospects of the companies we own. All companies have
their ups and downs. The market can over-react to both good and
bad news. Stock prices will fluctuate more than the change in
underlying business values.
It’s important to remember that many good companies will
experience stock price declines in bear markets. Berkshire Hathaway’s
stock is down a little over 20% in recent months. This has happened
before and shouldn’t cause any unusual concern. Berkshire
Hathaway (A shares) fell almost 40% from $8900 per share to $5500
per share in less than a year in 1990. It also fell from $84,000
per share to $40,800 from 1998-2000. Today the stock trades for
about $118,000. We suspect very few Berkshire shareholders got
out prior to each of the previous downturns and bought back in
after the price sank. It is far more sensible to maintain your
ownership of a company with good long-term prospects.
We know it’s hard to stay the course when stock prices
fall. This is particularly true when there are problems that are
obvious to everyone. There are two major problems that are weighing
on investors. The first problem is soaring commodity prices, particularly
oil and food products. Price increases in these areas have triggered
inflation concerns. The second problem is the decline in pricing
in housing which has caused staggering losses for investors as
well as homeowners. Until the outlook improves for one or both
of these areas, it’s difficult to see stock prices improving.
Both weigh heavily on consumers and are affecting behavior. However,
history tells us things will improve in these areas.
Consumers are changing their driving and shopping habits to adjust
to the new reality. When gas prices increase, people drive less.
They monitor the temperature in their homes, seeking to curtail
use. They use their SUV less and their smaller car more. Over
a longer period of time, alternative energy sources will be developed.
Supply and demand get back in sync and short-term price pressures
will ease. While long-term demand for oil is certain to increase
as developing markets use an increasing amount of oil, it doesn’t
seem wise to extrapolate recent price movements indefinitely into
the future. As to housing, prices reach a point where renters
look to become owners. The population of our country is increasing
and this creates new demand for housing. Lenders resume lending
to credit-worthy borrowers. As incomes increase over time, housing
becomes more affordable. While none of these responses solve our
problems overnight, they represent progress. Yes, there are problems,
but problems will be solved over time. Bear markets don’t
last forever, even though they feel that way when you are experiencing
one.
Mark Hughes Larry
Judge Rob
Noyes Ric
Ordway
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