Fear

In this posting I wanted to address the bizarre, ominous and ponderous fear that is hovering over the financial markets. Where is all of this coming from?

Do you remember early on I wrote a piece about the fact that around 60% of all U.S. equities were owned by institutional investors? These folks are insurance companies, pension companies, and investment companies (i.e. mutual funds). The majority of this money is managed in three money centers: New York, Chicago and San Francisco. However, by far the most major of these three centers is New York and specifically the little Tom Waitsian/Kafkaesque island of Manhattan. I can testify from personal experience that the world of finance is a very, very small universe. The world of high finance is really probably run by a total of about 10,000 people nationwide and I used to be one of them. [Interlude: yaaaaaawn]. What this means is that it only takes a small portion of that 10,000 to be freaked out and beside themselves to lead to massive stomach turning market nausea.

My point is that don’t let what a bunch of incestuous high finance types feel about their lives and their small worlds freak you out about the overall economy. These guys and gals (mostly white guys) are masters of the universe, but that universe is very, very small in the grand scheme of things. At this point, their panic is disproportionate relative to the amount of bad news that is actually happening at most major American businesses.

Why are these folks so panicked? They are freaked out mostly because they finally are realizing the “fruits” of their investment “labors.” This is a very polite way of saying that they wittingly pursued investment returns, damn most of the traditional and obvious risks. And now they, and the rest of us on the periphery, are suffering the consequences. There have been numerous bankruptcies and closings of financial institutions, bargain basement acquisitions, massive Manhattan-centered layoffs, suicides, shameful admissions, exposed swindlers, and lots and lots of other Bosch-like hells. Reaping what you have sown can leave some starving, yes?

At this point our task as investors is to identify strong businesses, make sure that we are not overpaying for them (and even freakin‘ Cisco (CSCO) is trading at an 11x PE!!!!!!!!!!!!!!) and you probably will not be, and purchase them. Meanwhile, ignore the news flow that is centered around the markets. Banks may fail, but you are still going to access the Internet. Banks may fail, but you still need to fill your car with gas. Banks may fail but you still need to eat. Etc.

Respectfully!

Jason