October 31, 2008
by John Ehrlich
Mark Kurland, President of North Castle Partners, one of the nation’s largest hedge funds spoke in a rare personal appearance in Chappaqua at the Men’s Club breakfast at Temple Beth El of Northern Westchester.
How does an investor weather a 2000 point decline in the Dow? Kurland offered some practical advice:
Mark Kurland’s tips
• Recent and coming declines will yield very attractive buy points. Stocks are approaching historic lows.
• Invest only in companies with pristine balance sheets. Companies that have lots of cash are safer and likely will weather the downturn more easily.
• Avoid investing in companies with debt. Even companies that have cash or established brand names like General Motors can be at risk of bankruptcy, which will wipe out stock values.
• Recognize that market greed has no end, so negative forces like excessive leverage, which caused the recent crisis, can and will occur.
• “Dollar cost averaging” is one strategy which can assure that personal investors are in the market at the right time.
“Dollar cost averaging” is the technique of investing a fixed amount at regular intervals, for example, quarterly or monthly, to avoid the dangers of investing at market highs and selling at market lows. According to Kurland, during the stock run up “if you missed the best four days, your gains would have been reduced by half.” On the other hand, he continued, “if you missed the worst four days you would be even for the year.”
Market expansion will start now, according to Kurland
While stock prices are likely to go down for a while, the market expansion may have already begun. Two key factors to watch are the reduction in commodity prices and forced selling.
“When you have a recession like this, commodity prices come down,” observed Kurland. Lower oil and energy prices are obvious. But this applies to other commodities as well. Citing Scotts Miracle-Gro (Ticker: SMG), key costs like fertilizer increased from $100 a ton to $1000 a ton. “It is now down to $300 a ton,” he said. “That is an opportunity.”
Leverage in the system has also come down. Proprietary trading desks at banks and other institutions have been unwinding (selling) their positions, as have hedge funds. “No long exposure,” he said, “everyone is short,” meaning that most investors are continuing to sell their stocks because they need cash to fund redemptions or they are betting that the market will be dropping further. When a trader sells stock he doesn’t own figuring that he can buy it later at a lower price, it is called a “short.”
Kind of reminds investors of the old ‘Hill Street Blues” axiom: “You be careful now, it’s dangerous out there!”
The Men’s Club of Beth El offers Sunday brunches, events, outings and team sports throughout the year. For additional information, contact Dick Goldsmith, president, at (914) 238-3360 or at .(JavaScript must be enabled to view this email address).
Mark Kurland, President of North Castle Partners, quoting Warren Buffett. “Be fearful when everyone else is greedy. Be greedy when everyone else is fearful.”
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