Market Madness

10.10.08 | 1 Comment

Dow Industrial Average over three years. This is one UGLY chart!
Dow chart over past three years, Oct 10 2008

There’s an old saw that’s used when talking about the stock market, it goes something like this: “When everyone is scared, be greedy. When everyone is greedy, be scared.”

About this time last year when the DOW hit 14,000+ points, everyone was feeling pretty good about things and I chose to liquidate our positions in the market. Why? I heard a local car wash attendant talking with someone about stocks and asking for tips. It reminded me of being in downtown Palo Alto at a restaurant when a busboy was talking to a VC about funding. Everyone was being greedy, I got scared. Did I get out at the top of the market? Nope.

Fast forward to August of this year as clouds were forming on the horizon and everyone was getting scared, that’s when I started to get back into the market. Did I get in at the bottom? Nope (we may not have seen it yet.) But I started nibbling then and I’m considering some big bites now. Here’s an example of the thinking (though I’m not considering the purchase of this stock.) Sun Microsystems. I make it a point generally not not write about former employers, but in this case, I’ll make an exception.

A market close yesterday Sun’s capitalization was just under $4B. This is a company that has Java, a full line of servers, a full storage line, chip design capability, profitable services, and a blue chip customer list. Has the company made mistakes? You bet. With sales of nearly $14B annually, it can’t seem to get or stay profitable. Suffice to say there are some pretty common sense decisions that could be made that turn Sun instantly and consistently profitable. Meanwhile, Sun’s plant, equipment, intellectual property, brands, and customer list themselves are worth more than $4B and the company has nearly $3B in cash on hand. So that’s right, for $1B a committed team could take Sun over, make the common sense decisions and have the $1B investment back inside a year, and then at a minimum, would see in excess of $1B/year in owner earnings flowing back into its coffers. A sharp team could triple that.

The point to this example? Sun is but one of the many companies that has been caught up in wildly negative sentiment and at present prices represent a bargain in the extreme. However, in Sun’s case, until and unless the Board of Directors determines it’s time to be profitable and forces the management team’s hands, owners are unlikely to see those returns. So there’s a bet to be placed in that regard.

When things are good, they’re never as good as people claim and the same is true when things are bad. Six days of triple digit losses on the DOW make people nervous, but they also result in unprecedented value available to people with intestinal fortitude. Don’t buy into the media hype, don’t give in to doom and gloom predictions by pundits who want you to tune in and read. Take a look at the basics, if a company has a good business model, a good product, good brand, and is being punished, now is a good time to buy at a steep discount due to mass psychology and fear.

Are we at the bottom? I don’t know. But I do know I see about 20 companies that meet my requirements for investment that are trading at 20-60% discounts over their prices 3 months ago and that’s making me feel a little greedy in a frightened crowd. I’m going long and entering the market with confidence. What do you think?

1 Comment