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Market Turmoil and Investing in the Water Industry
By Neil D. Berlant
October 11, 2008
Exclusively for InvestorIdeas.com
“The time to buy is when blood is running in the streets,” a quote variously attributed to Baron Rothschild, Bernard Baruch, and even John D. Rockefeller, Sr. In any case, it does seem to date back to the early 19th century, but it is as timely today as it was then. The heart of the argument is that the stock market is clearly driven by either fear or greed, and history shows that fortunes are made during times of economic distress or financial corrections. Every time we have experienced major market declines; e.g. 2001 and 1987, people said that this time it is different and we will never return to the prior highs. As we all know now, not only did we return to robust markets, but we surpassed the prior highs by a wide margin. Certainly while we were experiencing those periods, and I lived through 1987 and 2001, and several other momentous moments before them, it truly looked like the doomsayers were right. At the time, most pundits cautioned that those who hesitated to sell would be punished unmercifully. I suggest that it is not too terribly different today, although it probably feels like it is worse now. It always feels like today is different than before. Indeed, there are some things that are different today in that the stock markets, or rather investors, have disconnected the value of the businesses with the prices of the stocks. What we have seen in the stock market over the past few weeks has very little to do with the enterprise values of the businesses, or even their prospects, but instead reflects the excesses of leverage (margin), margin calls, and the preponderance of speculation which has been present in the market for a very long time. Among the biggest culprits in this massive global sell-off are the hundreds of hedge funds using leverage, of as much as 10-20 times, and cannot tolerate a sell-off. As prices decline, they are forced to sell which only exacerbates the problem. Add to that, forced margin calls and you have the makings of this massive sell-off. In other words, very little of the market action has to do with the operations and successes of the companies that are represented by the shares of stock changing hands on the stock markets. Much of the recent stock market action can be attributed to the combination of fear and margin calls.
Now, on the other hand, a better quote to use to address the current state of the markets is, “It was the best of times, it was the worst of times.” While Dickens was certainly not referring to the stock market, it does feel like the worst of times. Our nation is at war, the economy is slowing, we are just weeks away from a national election, and the stock market has been plunging. You might ask, what about that makes it the “best of times?” Well, from my perspective as an investor, focused on owning businesses, not stocks, and investing for the long-term, the opportunity to purchase shares of outstanding companies at significant discounts from recent levels is simply too enticing to resist. The dynamics of the water industry, which is of course the focus of all of my attention, have not changed or even deteriorated during this market meltdown. In fact, nearly every day, the prospects seem to improve. So, what this all means is that we are being presented with an unusually attractive opportunity to purchase shares of outstanding companies when they are on sale. I am not denying that it takes much courage to proceed when all others are fleeing, but more than two decades of specializing in the water industry, and 4 decades of experience in the securities markets as an analyst, portfolio manager, researcher, and money manager, all reaffirm the merit of investing in this particular time of turmoil.
Be assured, I am not cavalierly dismissing the pain connected to investment positions that are declining. Nor am I ignoring the news of the time, it would be hard to do that. On the other hand, I am paying close attention to the continuing success and prospects of the businesses we own and the industry we specialize in. With respect to their prospects, in my view, they are the best they have been since I began my focus in the mid-1980s. I have no doubt that before long we will look back at this period and see what a unique time and opportunity this was. While we are in it however, it does take a great deal of confidence to stick with what we have and to add more. Again, it takes confidence, not courage. I am quite certain about our prospects, market conditions notwithstanding, and continue to add to positions and stay the course. As always, I welcome your questions, comments, and occasional smiles.
Fund Manager of the PFW Water Fund : PFW Water A (PFWAX)
Since 1968, Neil has been continuously involved in the investment banking industry, either as a principal, officer, or founder of several firms. He has supervised and initiated the publication of numerous investment research reports on the water industry and conducted conferences directed towards top corporate management, the investment community, and venture capitalists. He has been a speaker at conferences on topics ranging from financing, to business and investment opportunities in the water industry. In addition, he has consulted to Fortune 500 companies and participated in negotiations concerning mergers, acquisitions, and venture capital investments. He is quoted frequently in newspapers including the Wall Street Journal, The New York Times, Los Angeles Times, Investor's Business Daily, and many others. www.CrowellWeedon.com
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