Date: 2024-12-21 Page is: DBtxt003.php txt00021641
INVESTMENT
STANSBURY RESEARCH
How I Learned Lehman Was Drowning Before Almost Anyone Else and other matters
STANSBURY RESEARCH
How I Learned Lehman Was Drowning Before Almost Anyone Else and other matters
Burgess COMMENTARY
This is a light hearted read ... from my viewpoint not to be taken particularly seriously. It does, however, have some important substance. Specifically this is to do with how to understand data and relate it to a bigger universe where there is rather weak or no relevant data.
In the modern world where technology like AI is being increasingly used, but with ... in my opinion ... dangerously incomplete data. My age group, for example, does not have a very strong digital footprint and it is unlikely that our profiles are anywhere as complete as the profiles built from the digital activity of younger cohorts.
I have worked in a lot of developing countries, and while there are now a quite substantial number of cell phones, what they are used for cannot give a particularly meaningful digital picture of very much if anything that really matters. In my own work over the years I have found that different places have very different essential characteristics, most of which are unlikely to have been captured in any format anywhere.
I would also observe that more computer power is often used to get more precise data, but much less often to get a broader set of data that would help put everything in perspective. Thew following experience has something of this in what is written.
Peter Burgess
The Stansberry Digest
8:35 AM (15 minutes ago)
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Editor's note: The numbers don't tell the full story...
Our director of research, Matt Weinschenk, learned this lesson in a room full of investors at the start of the 2008 financial crisis. In short, the market's fundamentals matter – but there's no substitute for 'boots on the ground' research...
In today's Masters Series, updated from the October 1, 2018 Digest, Matt details how to gauge the market's 'feel'... and explains what he learned about calling the bottom – and the top...
How I Learned Lehman Was Drowning Before Almost Anyone Else
By Matt Weinschenk, director of research, Stansberry Research
I was one of the first people to know that Lehman Brothers would go bust...
But I didn't figure it out for myself. I was just a 25-year-old kid sitting in the right place at the right time (the 2007 Value Investing Congress in New York City, to be exact).
I was in the room when short-seller David Einhorn walked the audience through his thesis for why the investment bank would go bust...
Einhorn didn't hook the audience with a gripping story. He just talked numbers. The shocks had already started to show in the banking system... Lehman looked like it had one of the worst loan portfolios of the banks, but it hadn't written off any losses yet.
Something didn't add up. Einhorn knew an earthquake was coming.
It was November 2007, and the financial crisis was looming over Wall Street and all of America. But the market hadn't crashed yet.
And I was about to learn the biggest lesson of my investment career...
As investment conferences go, the Value Investing Congress represented the best of the best at that time. Every speaker managed billions of dollars. Even in the crowd, you could find yourself sitting next to hedge-fund royalty.
However, what I learned had nothing to do with what the speakers said on stage, the investment ideas they presented, the charts they shared, or the balance sheets they studied.
It had a lot more to do with the mood in the room...
Between every session, folks would get on their BlackBerries to check in on the stock market. Whoever got an update would yell it out in the hallway.
Several speakers made good cases to buy stocks. After all, these were value investors. And you have to have guts and buy when there's 'blood in the streets.' They didn't know it, but the streets were about to get a lot bloodier.
See for yourself: During the conference, we were right here in the market...
We were on the precipice of the greatest financial crisis in 60 years. Everyone was worried... But we had no idea how far the market would fall. The S&P 500 Index was about 6% off its peak. The financial sector had already fallen about 20%.
I take a data-focused approach to investing... Rather than drawing lines on charts like some of my colleagues who specialize in technical trading, I focus on economics and fundamental data.
But at that conference, I learned that numbers will never tell you everything you need to know.
TIME TO PANIC?
Whether you're in cryptos or stocks, it has been a brutal start to the year for investors... which is why you NEED a plan that takes all the emotion out of the equation... and allows you to sleep soundly at night. Here's exactly what we recommend you do before Monday.
The market has a certain feel to it. You can only pick it up by talking to investors, hearing hedge-fund managers speak off-the-cuff, and listening to candid conversations that aren't supposed to leave the room.
In November 2007, an uncomfortable, grim humor filled the air.
The people in the room stood to lose billions in investor money, and many would lose their jobs. Even so, they weren't panicked. They joked and laughed. They assumed the other guys' portfolios would fall apart, but not theirs.
When a presenter pitched a long stock idea, he'd finish up with a winking disclaimer like, 'That is, if you're brave enough to buy any stocks right now.' Other speakers made similar jokes: 'This is a buy... if there even is a financial sector tomorrow.' The crowd reacted with nervous laughter.
What I realized later was that when the bottom is truly in, nobody is cracking jokes...
It's pure fear.
Had the speakers sensed that, they could have avoided some disastrous calls. I remember hearing a presentation from Tom Brown, who runs a website called Bankstocks.com and a hedge fund focused on bank stocks. He basically threw up his hands and admitted it's hard to figure it all out when everything keeps moving so fast.
I do remember one bold claim he made, though...
I think we're really close to, if not at, the bottom for the financial-services industry. There are many opportunities in the most battered sectors.
That same day, news service Reuters reported his fund was down 50% for the year... Yet, the S&P 500 Financials Index would go on to fall another 80% from there.
Portfolio manager Richard Pzena of Pzena Investment Management gave a talk claiming that Freddie Mac was the cheapest stock he had ever seen. After that, shares of Freddie went from $35 to around $1, and nearly brought down his investment firm in the process.
Today, everybody wants to be the person who calls the top. That can be just as hard as calling the bottom... And no single chart or numbers-driven solution is the silver bullet.
But the reverse of what you see at the bottom – pure fear – is pure euphoria. And we're simply not seeing that euphoria yet. That means the market can still climb the 'wall of worry' higher.
As the old saying goes, the most dangerous words in investing are 'this time, it's different'... That's catchy. But in one sense, every time is different. We've never had fast-growing technology companies, a decade-plus bull market with ultra-low interest rates, and a pandemic-induced market crash – followed by a roaring recovery and unemployment below 4% – all in rapid succession. Of course it's different.
What have never changed are investors' mindsets. They're always driven by the same fear and greed...
They're likely to let their emotions lead them into doing the exact wrong thing at the exact wrong time. And eventually, they'll bid the market up to unsustainable levels before the whole thing comes crashing back down like a house of cards.
As journalist Edwin Lefèvre wrote about trader Jesse Livermore in his classic 1923 biography, Reminiscences of a Stock Operator...
There is nothing new in Wall Street. There can't be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.
That will never change. So look at as many charts as you want... But make sure you're listening to what investors are saying, too.
Good investing,
Matt Weinschenk
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Editor's note: At our recent start-of-the-year kickoff event, Matt joined Stansberry Research senior partners Steve Sjuggerud and Dr. David 'Doc' Eifrig to share their thoughts on today's market... what could happen to stocks in the months ahead... and their No. 1 stock recommendations for 2022.
If you missed it, a free replay is available for a limited time only – including their playbook for how to make this the best year ever for your money. Listen to their urgent message right here.
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