The Bottoming Process

The markets turned decidedly ugly again in the last couple of weeks and the major market averages have reached new bear market lows. Is this the bottom? That is the question being asked in just about every financial market conversation either in media or around the water cooler. The answer is simply: we don't know, nor does anybody else. It should be noted that the bottoming process is simply that, a process, and as noted in the chart of the S&P 500 above, we have witnessed what may be a second bottom on Monday, March 9, 2009. Only time will tell if this one will hold up in further tests.

What we did observe in this recent new leg down was that many companies did not reach the November 20, 2008 lows. In fact, in our own experience, our portfolio did not reach new lows, in the aggregate. We strongly believe this is a sign that the market has started to more seriously focus on placing value in those companies with real businesses which are creating economic value-add for their customers and ultimately their shareholders. We have discussed the concept of investing in real businesses in previous posts , such as this one, and this one.

We clearly recognize how difficult it is in times like these to view investing in terms of ownership of businesses over multiple market and economic cycles, but it may truly be the solution for most market participants to adopt this way of thinking. Granted, some may suggest there is no other alternative but to be "long term" now since everything has been so beaten up. Yet it is consistently our belief that the proper way to invest in the stock market is to think of it like owning a group of businesses. This allows one to set aside the often irrational and emotional swings of the market prices themselves and focus on what makes business sense.

However, let us make something very clear about what is required in order for us to maintain this view and where there are potential signs of danger. As long as companies are able to operate in a relatively "free enterprise" environment, we can feel comfortable being owners. We discussed the dangers of intrusive government regulation and intervention in private enterprise in our November 2007 post "What's Really Troubling the Market". We wrote then that the prospect of tighter regulation and higher taxes was weighing on the market and would suggest that the barrage of such talk from those in government today is equally responsible for much of the selloff that we have witnessed. The question is whether the actual policies will be so harmful as to turn a relatively free enterprise system into one which businesses cannot operate and provide the economic value-add that is necessary for shareholders' long term success. At this time we believe that is highly unlikely and, in fact, the more talk there is of intrusive government, the more the markets will act as a self-correcting mechanism keeping the powers that be at bay and allowing the wonders of freedom and innovation to lead us out of this crisis and on to greater accomplishments.

This current market is a shot across the bow, so to speak. We, and the rest of the marketplace, will be watching closely.


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