Letter to Clients After Tragic Events of September 11, 2001
September 14, 2001
Dear Clients,
The tragic events of this week will last in our memories forever. We would like to extend our deepest sympathies and condolences to the victims of this tragic crime and their families.
This unthinkable act has been enormously unsettling for all of us. Many of you have called our office asking what effects this will have on the financial markets, as we have seen negative reactions in the world's markets while the markets here at home have been closed. While it has been difficult to think of anything else, we have been analyzing the financial repercussions of this event. Our thoughts below are in response to your many calls and are meant as a confirmation of our commitment to your portfolios in this time of crisis.
The tragic event that has taken place this week will cause short-term market dislocations. However, we do not believe that it will impair the long-term intrinsic value of the businesses that we own in your portfolios. With this in mind, we will continue to exercise our discipline of buying and selling companies based on sound business principles.
As we have stated many times, we are long-term buyers of good, solid businesses purchased at the right price. For some time now, we have felt that the market has been extremely overvalued. Consequently, we have sold, and will continue to sell, companies in your portfolio that reach our sell point.
Because the majority of stocks today are still selling at valuations that are near historically high levels even after the past 18 months of market correction, we have not been able to replace all those stocks that have been sold. For newer clients, it has taken us longer than normal to achieve higher equity exposure. The effect of this has kept your portfolio in higher-than-normal cash positions, and we will continue to do so until such a time that we can find good companies selling at substantial discounts to their true intrinsic value. This is the foundation of our disciplined value approach.
During 27 years of managing clients' life savings and having studied markets going back as far as the 1920s, we have learned that stocks fluctuate around their basic intrinsic value. While stock prices can reach extremes both on the upside, as we saw in technology stocks in the late 1990's, and on the downside, as we saw in the 1974 bear market, they rarely go much lower than 70% to 75% below their private market value (the ultimate price that sophisticated and informed buyers and sellers would agree to pay, i.e., the buyout value). And that extreme valuation may only be reached once every 10 or 15 years. If stock prices do reach that point, they do not stay down very long. In the 1974 bear market, for example, the extreme lows only lasted for a period of six months before they began to rise. Since we do not start buying companies in your portfolio until they are already at 50% to 60% below their private market value and then dollar cost average in from there if the price gets lower, you can see why we have very little risk of permanent loss of capital. This is what Benjamin Graham, (known as the "father of security analysis,") referred to as the "margin of safety."
In reflecting back to the beginning of this bull market that started in 1974 and lasted until April of 1998, we would like to point out that it started with the greatest uncertainty that had ever existed with the exception of the 1929 depression. In 1974, inflation was running at 12%, oil went from $2 to $10 per barrel, a major recession was in progress, the government implemented price controls and the country had to face the impeachment of President Nixon. Yet out of this dismal environment, the largest bull market was born. At some point stocks discount the worst of events and then look beyond.
While there are many more examples throughout market history, we would like to comment on one that the newspapers have recently referred to in recent days - Pearl Harbor. At the inception of this attack, the market went down for approximately five months and then turned around and increased 90.6% (13.75% annualized) for the next five years, which covered the entire period of the Second World War.
While this is a good example of how the market can rise in the face of bad news, we do not think it is a good example relative to today's market environment as stocks were about as cheap as they could get back then. Today's market is still overvalued, it will most likely take us a while before we can add many positions, as good values are hard to find today. However, when stock prices of good companies go down, for whatever the reason, we will be adding companies to your portfolio that will have enormous potential with limited risk.
While there is much more that could be said about how to handle financial decisions in times of crises, none have said it better and with fewer words than Benjamin Graham. We hope this quote will mean as much to you as it has to us in making financial decisions in difficult markets.
After reviewing his career, Benjamin Graham wrote in his book, "The Intelligent Investor":
"A final retrospective
thought. When the young author entered Wall Street in June 1914 no one had any
inkling of what the next half-century had in store. (The stock market did not
even suspect that a World War was to break out in two months, and close down
the New York Stock Exchange.) Now, in 1972, we find ourselves the richest and
most powerful country on earth, but beset by all sorts of major problems and
more apprehensive than confident of the future. Yet if we confine our attention
to American investment experience, there is some comfort to be gleaned from
the last 57 years. Through all their vicissitudes and casualties, as earthshaking
as they were
unforeseen, it remained true that sound investment principles produced generally
sound results. We must act on the assumption that they will continue to do so."
Please keep in mind that the 57 years that Mr. Graham wrote about included World War I, the Great Depression, World War II, the Korean War, the Vietnam War and President Kennedy's assassination. While the recent tragedy is one of the worst disasters on American soil, one can see, from a financial standpoint, the stock market has been able to withstand catastrophic events and eventually look beyond them.
You have our commitment that we will continue to use sound investment principles to manage your portfolios. If you should have any further questions, please give us a call at 800-664-4888.
Sincerely,
Century Management
Arnold Van Den Berg, John
Dixon Craig Miller, CFP,
James D. Brilliant, CFA, Barrett Evans, Tom Siderewicz,
Scott S. Van Den Berg, CFP, Samuel D. Hale, CFA, Brian Wachsler,
Aaron Buckholtz, CFA, Nate Levy
