July 2002

It is now mid-July 2002, more than 28 months since the tech bubble burst and stock markets are as depressed as ever. It seems that every time it looks as though we have finally turned the corner in this bear market, something else happens to spark new concerns. So up and down we go. Over the past 28 months, investors have grappled with economic uncertainty, the terrorist attack of September 11, intensified violence in the Middle-East, the crisis in Argentina and now a string of accounting scandals and record bankruptcies. If you’re just about fed-up, you’re not alone. I’d like to comment on these latest events and offer some suggestions as to how to deal with the current mood of pessimism that has taken over.

Infectious Greed

There is no doubt that the recent news of more accounting fraud has seriously shaken investor confidence. And the fear is there may be more such stories yet to unfold. But, does it mean we can no longer trust corporations with our hard-earned dollars? Have these scandals racked investor confidence to the point of no return?

In order to understand the real dynamic of what’s happening, it is important to put these scandals into context. First, it needs to be said that the likes of Enron and Worldcom are a minority. Most corporations continue to play by the rules, conducting themselves with integrity.

Second, it is no mere coincidence that these cases of corporate malfeasance have surfaced in the aftermath of one of the most speculative periods in market history – the infamous tech bubble. To use the words of Alan Greenspan, Head of the Federal Reserve in the US, it was a time marked by “infectious greed”; a period when avarice clouded most everyone’s better judgement, not just that of the now defiled CEOs. In such a climate, it is only natural – unfortunate, but natural – that some companies would be tempted to fudge the figures. As the former premier of New Brunswick, Frank McKenna was recently quoted as saying: ” ?the corporate scandals have been pushed by pure greed, and that greed is not just at the level of CEOs and management, but all of us shareholders who want bigger and better returns. We keep pushing for better returns and we sell out to buy shares in companies with high returns and it just creates a culture in which companies feel they have to force so much profit out that they start turning to aggressive accounting.” – The Financial Post; July 9, 2002

There is no doubt that better regulations will go a long way to cleaning up such practices and restoring investor confidence. But many observers believe that will not be ultimately necessary. In future, the kind of financial punishment that only the stock markets can dish out will be a big deterrent, not to mention the inevitable lawsuits.

Despite the current panic, my guess is that this whole mess will be long forgotten in another year or so. But, if there is a lesson to be learned, it is not that corporations can no longer be trusted. Instead, what we all need to remember is that greed can get the better of just about anyone, whether they be corporate leaders or investors big and small. The stock markets are not an instant lottery. Wealth is only generated over time through due diligence, patience and discipline.

Opportunity knocks

So where do we go from here? How long can this seemingly never-ending bear market drag on? No one ever knows the answers to such questions. At this point, now that greed has given way to fear, so much is contingent on investor psychology rather than market fundamentals. Despite the current mood, fundamentals are looking strong. From the economy to interest rates to rising corporate profitability, there are a lot of positives. Yet, with the sharp declines we have seen over the past several weeks, you would think that we were headed into a recession not coming out of one. In this kind of market, anything can happen in the shorter term. The important thing is to keep reminding ourselves that eventually the market always comes back to fundamentals. And as long as these are strong, it is only a matter of time before valuations start to rise again.

In the meantime, there is no doubt in my mind that opportunities for the long-term investor now abound. The shares of many great companies are now on sale at greatly reduced prices and now’s the time (pardon the pun) to stock up. As a mutual fund investor you don’t even need to know which ones offer the best value because you have confided that job to your mutual fund managers.

This is not a market prediction. I have no idea how low valuations may finally go, when prices may start to rebound, nor how long it will take for the major stock market indices to reclaim their former lofty heights. It could take years. But ultimately it doesn’t matter as long as you have a long term investment horizon and the opportunity to add to your investments at prices we may never see again. Nothing is for certain. That is the nature of investing in stocks. But as Warren Buffet, one of the most successful investors of our time has said, “The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long term values.”