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Cisco Systems
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Whistling Past the Graveyard

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By NorthCarolinaKen
September 27, 2002

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I believe I am about the same age as Andy and I have been active as an individual investor since the early '60s. I acknowledge Andy's point of view but I have a different perspective than he does. I don't quarrel with much that he has to say except for the word "always."

The excesses in markets are caused by mass psychology with the Internet Bubble a typical and recent example. There are two characteristics of these movements: they are not really predictable in advance and if you are part of that movement, you are unaware of it. For example, we had a business consultant in last week who marveled that the executives with the best view of the telcom industry did not see the rising overcapacity until they were overwhelmed by it. Most investors were even further removed.

Recoveries from business excesses are also unpredictable. We have had long recovery periods in the '30s and '70s but the 1987 crash, also a bubble market collapse, had a "V" deflation and recovery. There are just not enough data points to make any definitive assertion on the length of recoveries and I believe the best view is that they are not predictable.

One thing I regret is not accumulating stocks in prior bear markets. Since I have always attempted to buy stocks cheaply, none of those markets crushed me but I did get mauled by them. I tended to freeze up and ride them out. I was never a buyer. Bargains appear in bear markets that you don't see for long periods of time. The '90s bull run was 10 years long, also a record and likewise unpredicted.

I have been impressed reading about Warren Buffett's actions in cyclical corrections. He is delighted in bear markets because bargains abound but depressed in bull markets because of the dearth of them, the opposite of the crowd. In the long, grinding bear market of the '70s, he bought all the way through it. An excellent description of this is in the book, "Buffett, the Making of an American Capitalist." Another superstar investor with similar views is John Neff, interviewed in this week's Barron's. Neff is buying in this market.

Buffett didn't know when bear markets would end and from what others said about him, he didn't care. When price was cheap relative to value, he bought. He made no attempt aside from normal buying tactics to time the market. In many cases, the stocks went down after he purchased them. Two situations where you could have easily beaten Buffett was to buy Well's Fargo or Salomon Brothers after he filed his purchases with the SEC. The Street thought he had lost his way with these stocks. He was also lambasted for buying See's Candy and Coca Cola with a view that he over paid for them.

If you aren't going with the crowd, it doesn't make you right but if you are, you are in danger. If you follow the options market, which I do as a data source, not to invest, you know that put/call ratios are hitting record highs but the pros are too frightened to use these contrary indicators to make bull spreads. The crowd is moving in fear. What this means to me is not to try to time a rally but rather to be very suspect of the despair.

In my view, the current investment bubble is in US Treasury Bonds. They are at 40 year highs and climbing. People flocking to these instruments as a safe haven are doing the same thing conceptually that the internet bubble investors did only it is a bubble of despair, not euphoria.

I am taking my guidance from investors like Buffett and Neff. I am determining value as best I can and buying tactically. When the market falls like it has over the past several weeks, I let it go. When a trading range develops, I put limit orders in at the bottom of it. I am not timing or predicting the end to this market or how deep it will go. Am I scared? Sure. However, I am convinced enough to put my hard won cash down on equities. I don't perceive running away as the rational path.

Ken


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