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Old Rules Still the Same

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By EliasFardo
October 23, 2008

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We are in a brave new world now.

When I said earlier that this time it is different, I didn't mean that everything had changed; just that the damage in the credit markets was so extreme that prior experience in bear markets may not be very helpful in predicting the depth and length of this one. And we can see how extreme the damage is by the dramatic steps taken by the fed, treasury, FDIC and foreign central bankers to mitigate this crisis.

FWIW, I don't believe we have seen the bottom yet, there is too much bad economic news in the pipeline for that. But, looking at this from a human emotions angle, when we start seeing We are in a brave new world now type statements, it may mean that the bottom is at least something that is capable of being seen. The vantage point may need to be very high, but maybe it is seeable.

In 1999 we had no shortage of pundits explaining how the world had changed forever, how paradigms had shifted, how a new era had arrived, how the old rules do not apply anymore and that trees do in fact grow to the sky. That talk was not just concurrent with the final denouncement in 2000, it preceded it as well.

We saw then and we will see it now, that things actually do change a lot, but that the underlying rules are still valid. The lesson we will be asked to learn once more this time is that neither a person, a company nor a country can extravagantly live beyond its means forever or borrow its way to prosperity. The lesson we were supposed to learn in 2000 is that value does matter. But, with wildly inflated housing prices ushering in this bust it appears that lesson did not stick. And the leverage lesson will not be permanently learned this time either.

The inexorable march to a market bottom and recession's end will be peppered with shouts of failing ideas. We will be advised on how to invest differently, how to regulate differently and how to manage differently. Reviewing what went wrong, articles and books will present the whole parade of horribles that are this crisis. Some of this will even be helpful, but claims that wholesale changes are needed are off base. How is this a brave new world? All the important stuff such as balance sheet integrity, free cash flows, valuations, moats, managerial integrity, etc. are and will be just as valid as ever. Maybe the brave new world will be to quit doing things that ignore or violate the things that have been and always will be real and true.

The 1999 bull fed on claims that the old ideas were now dead. Maybe that is true of bears as well. One way to gauge the approaching market bottom may be to quantify the execution of ideas. Good ideas, bad ideas, right ones and wrong ones will be taken out one by one and shot. That last holdout; that last person whose pain threshold is the highest of us all, will one day discover that his last idea has died. He won't know when it occurred or what caused it, but that one last thing that he was holding onto is now gone. When the last idea dies, and the last seller sells, the market will turn.