Tuesday, January 22, 2008

A Reality Check

Just when you thought we were dead and buried, we return. Our last post was in 1 July 2007. And we went almost six months without a single post. In the intervening months, global markets continued their uptrend, save for a hiccup or two in August/September. Despite the challenges, the STI was still up 17% in 2007. Fast forward in 2008, oh how the tide has turned! I believe the STI is down by almost the same percentage after 20 days into the year.

The words: recession, doom and gloom is hogging all the headlines today. As we write this, the doctors at the US Federal Reserve has just ordered a 75 basis point cut to the Fed funds rate in a bid to sooth the nerves of jumpy investors worldwide. We are not market timers but we had been advocating all to exercise caution during the mighty run up throughout 2007 [See the posts - A Time for Especial Caution, The Sun Always Shines (only on TV), This Time It's Different, Canaries in the Chinese Coal Mine]. The way several asset classes - equities, bonds, commodities and real estate unraveled recently makes the post in May 2007 (This Time It's Different) seems spot on. Whilst our heart goes out to those in negative equity, the splate of market weakness helps to inject some much needed normality into the system.

We see values being created in some sectors. In the days ahead, more opportunities should emerge. Investors who have established fair value for companies with strong management and little leverage should rub their hands in glee as prices sink below their fair value.

We close our first post of 2008 with a line from Mr Buffett: "Be fearful when others are greedy and greedy only when others are fearful."