The Market: Bull, Bear or Dead Cat?

The sky is falling. The market is tanking. The banks are failing. The global system of finance has lost the faith of the people. No. No. All is well. The international community has saved the day. Welcome to panic in the year 2008.

I know it's easy to be cynical about Kippling's famous line, "If you can keep your head while all about you people are losing theirs, then you're a man." Aside from the sexism from the old colonialist, in this case it's a good observation. The best indicator of when the pros sell is when the market, any market, gets pumped up by amateurs who believe that they can only make money and no special knowledge, talent or research is necessary. When you see people identifying themselves as day traders and earning their living churning their own portfolios, when you see ads for playing the futures market, trading in commodities and foreign currency, you know to rush for the exits because the bubble is about to burst. The pros will make money as the bubble inflates and short the market on the way down. The late entries, the smart kids, the amateurs will get slaughtered.

The pros buy when the market hits bottom--or as close to the bottom as they can guess. Well, guess isn't really the right word. They actually know stuff and so while facts don't always determine the outcome, they are pretty handy to have at one's disposal--before the market, any market, disposes of you. You see, at some point, most companies or commodities have an intrinsic worth.

Think about your house. It may have had a price at a million and a half. Its appraisal may have fallen to a million or even 750, 000. But at some point, it has some value. Now when it was 1.5 million, you were not rich. You didn't make money if you didn't sell it. When it falls in value, you won't lose money if you don't sell it. Everyone is panicked by being upside down in their houses, that is having the loan being greater than the value. Oh horrors. Oh uncharted situation. Really?

Anyone who buys a new car is upside down the moment you drive off the lot. Your new car, that you just paid say 50k for, is now, by dint of having been registered to you, a used car. You are upside down by about 15k. Yet you're still paying the monthlies. There is no problem unless you have to sell. Then you're in trouble. But you are neither rich when prices go up, nor poor when they fall--if you do not sell.

You see the pros study what things are actually worth--not simply what they sell for today. Bubbles are sometimes obvious. The most famous is the tulip bubble when bunches of people bid up tulip bulbs. When push came to shove and the fad faded, the bubble burst. The Dotcom bubble of the 90s was another predictable disaster. Certainly some companies would find a path to profitability, but most wouldn't, and there was no intrinsic value to most Dotcoms. Every successful high tech company knows it is one innovation away from irrelevancy and therefore bankruptcy. This is why the giants are relentless in buying up or strangling in its crib any other company in its ecological niche.

Too many amateurs believed that cool ideas in cutting edge industries would inevitably succeed. Too many amateurs thought that enthusiasm was enough to hold up the value way past any rational value.

So right now, as the market climbs steeply the pros are buying companies that have good price earnings ratios. They are not buying everything. They don't know if this is a suddenly reborn Bull Market (not the way to bet) or what they call "A dead cat bounce." What they do know is that there are some bargains and that their time to buy is when the amateurs get frightened and panic sell. No market is designed for amateurs. This market has revealed too many self-proclaimed pros to be, in fact, amateurs. How do you tell the difference? The pros don't panic. Note that Warren Buffett bought in when the panic was setting in.