My first experience with a haunted house was at a carnival in a neighboring community. Quite out of character, my parents ceded to my pleading and bought me the two dollar ticket on the condition that I’d have to go in by myself. At seven years old, I was at the stage in life where a man really wants to prove his courageousness — you know, the 7 year-old to 55 year-old stage.
— Bravely at first, but then tenuously, I ascended the stairs to what was essentially a modified semi-trailer painted black with haunting images of grim reapers, witches, and ghosts. Entering, my first sensation was a very strange smell, accompanied by a thick fog which I could feel more than I could see, due to the blinding darkness. I could barely make out the path to take through periodic flashes of light and any hint of courage I once had was gone.
Older kids pushed by me, unafraid… but I, I was very afraid. Hissing, cackling, and screaming now pierced my ears to round out each of my senses with a full dose of outright horror. I had taken no more than five steps inside before the fear overcame me and I retreated in shame. I sacrificed my parents’ two dollars on the altar of cowardice.
Fear is a blessing and fear is a curse. Fear is an honest guidepost, and fear is a deceptive liar. Fortunes have been made by the mastery of fear, and lost by the failure to heed, or to control fear.
Today, fear permeates the equity markets – and rightfully so. Who would have thought that Lehman Brothers, which survived the Great Depression, would collapse in a heap along with fellow Wall Streeter, Bear Stearns? Who would have thought that GM would be Government Motors, and that AIG would go from insurer to insured? Take it back less than a decade ago and we frightfully recall other grim reapers like Enron and WorldCom. Folks, no question, we have been through some ugly, ugly days.
S&P 500 Price Chart with Fear/Greed Indicator
Judging by Bloomberg’s Fear/Greed oscillator, we are now carrying 26 consecutive months in which selling pressure has outweighed buying strength. In fact, the past decade has suffered the consequences of radically higher selling pressure by duration and by severity than any other timeframe in recent history. The first decade of the new millennium started with buying strength that was irrationally high, and ended with selling strength that was equally irrationally low. Today, bond funds are at or near historic highs as investors continue to plunge into “safe” securities. Despite growth in corporate profits and earnings estimates forecasting record Earnings per Share (EPS) within two years, the equity markets wallow.
Though earnings growth projections are high, the S&P 500 trades at a Forward PE multiple of 13.9. EPS on the S&P 500 have almost doubled since the middle of 2002, meanwhile the valuation of those companies has appreciated a mere 35%. The only conclusion one can draw is that something… something powerful… is preventing investors from taking that step into irrationally lowly-valued equity investments. That something is fear.
S&P 500 Trailing 12M P/E and EPS graph
But let us remember that the darkest hour is just before the dawn. Now may be the time to take calculated risks that factor in the potential for losses, but also factor in the cost of missed opportunity. Take, for instance, the following resilient ideas for investing in today’s market:
- Rapid Growth in Mobile Internet Devices: Consider that while it took almost five years for desktop internet (Netscape) to reach 50 million subscribers, mobile internet device subscribers skyrocketed to surpass that number in less than two. The next few years will play host to millions of people whose first and only experience with the internet is through a mobile device. This is a powerful trend which will drive the technology and telecommunication industries.
- Increasing Disposable Income in Emerging Markets: As China and other emerging markets with massive demographics shift from export based and agriculture-based economies, to thriving, urbanizing, consuming economies, disposable income in these markets will grow at an unprecedented scale. This is an extremely strong catalyst for infrastructure demand and retail consumption of goods and services, that cannot be ignored.
- Biotechnological Solutions that Improve and Extend Life: When it was announced that the human genome was decoded in 2003, the thought was that it would unleash a wave of biotechnological and pharmaceutical innovation. While it didn’t come instantaneously, the wave has been steadily building, and only now are we beginning to see those fruits. Combined with other advances, this field is ripe for harvest.
- Demand Upsurge in Energy from the Third World: While the US uses roughly 7.8 Tons of Oil Equivalent (TOE) per capita, per annum, China uses 1.3. That figure seems amazing until you consider how that figure itself has even grown. In 1965, China’s energy usage per capita, per annum was 0.19 TOE. That makes the growth even more astonishing. Today, India uses 0.35 TOE and this can only continue to increase. Exponential growth in energy demand is an easy forecast. For a graphical illustration of this growth, visit Gap Minder , which provided these figures.
These are all ideas that we see as being immensely powerful and relatively impervious to market weakness, reducing exposure to dangerous risk and the paralysis of fear, but seizing opportunity while it presents itself. Each of Yellowstone Partners’ investment strategy portfolios capitalizes on these areas and offers investors a reason to defy their anxiety.
Take some advice from a guy who knows (Warren Buffett) and be greedy while others are fearful. Save your fear for a time when others are greedy. Don’t sacrifice your profits on the altar of cowardice, talk to your financial advisor about taking risks that are worth taking. Don’t be oblivious to your fear, but don’t obey it blindly like a seven year-old boy in a haunted house.