I didn't find a burgundy leather briefcase in Filene's Basement that morning, but the experience was one of those life lessons that you do not forget. From it I have distilled a general philosophy for making decisions about "bargains" that has helped me in my role as a professional portfolio manager. To wit:
Most of the time, quality investments are not "on sale." Market activity is usually conducted in the "upstairs store," with fairly orderly pricing, by buyers and sellers whose behavior you more or less understand. In this environment, I stick to my asset-allocation plan and only shop for specific investments I need to maintain the intended balance in my portfolios.
There are rare occasions when the market loses its balance. This is when quality investments wind up in the bargain basement, mixed willy-nilly with the questionable stuff, and the price of everything is collapsing daily. This sort of chaotic environment presents an opportunity to load up on quality merchandise at truly bargain prices. In this setting, I am willing to raise my allocation for the asset class that is "on sale."
In the wake of last year's technology rout, some have begun to wonder whether, in fact, the current market presents one of those rare opportunities. After all, many great companies' stocks have been marked down rather dramatically from the prices at which they were freely changing hands a year ago. Shares of Cisco fell from $82 to $33, GE from $60 to $42, Intel from $75 to $30, IBM from $134 to $80, Wal-Mart from $69 to $42, Microsoft from $118 to $41, Worldcom from $55 to $14.
Do these prices represent true bargains, or have they just been reduced from unrealistic to something approaching normal? Have we seen the worst of this bear market, or is there more devastation ahead? Your clients and mine want to know, and they are looking to us for guidance. My current advice to our firm's clients is that there are at least three reasons to hold onto their wallets for the time being:
The stock market indexes do not represent great values.
Fundamentals will probably get worse before they get better.
Gloom has clearly not yet replaced investor optimism.
In short, the markets are still fairly orderly. We are still conducting business in the upstairs store. There are none of the signs of chaos that attend inflection points in the markets when great bargains can be had. And, most important of all, the prices are not that great!
Investor Emotions Are Key