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October 8, 2008 / Danny Robinson

Is this Financial Armageddon? Warren Buffet, show us the way!

I’ve been watching and reading CNBC, Bloomberg, New York Times, Paul Kedrosky and everything else I can get my eyes on.  And I think I’ve figured it out!!  NOBODY knows what’s going to happen with the economy.  It’s a very unsettling time.  I actually feel like I’m staying up to date with developments of the bailout, the elections and the extreme depth of the problems the world faces as a result, but they’re not providing me with any conclusions.

I do, however, have two fundamental beliefs:

  1. The economy will recover at some point (1-5 years)
  2. Investors make the most money when they buy low and sell high.

So am I making is this just too simple?  Is the “Buy low and sell high” doctrine just too obvious to really work?  With the dow closing at 9447 today, I think we can all agree, that we’re in a buyers market.  Take Warren Buffet and JP Morgan for example.  A New York Times article, Like J.P. Morgan, Warren E. Buffett Braves a Crisis, calls Warren a “Profitable Patriot”.  The biggest fortunes in the world’s history have been made in times like these. But investors are also human, and fear does often override this basic common sense logic.  The smartest investors are the ones who can put their fears aside, and invest long in companies now, when valuations are low.  By the time these companies are ready for a liquidation event, the markets will have returned.  I still find it very puzzling how some long term investors (like Angels and VCs investing in private startups) make investment decisions based on short term indicators.  Ron Conway is one of the more respected Angel investors, and I take the message that he’s sending out to entrepreneurs as a pragmatic warning of my very point.

“I would tell (entrepreneurs) to keep their day job until they got one year of funding, and if they couldn’t get that, then they’re not meant to start that company right now…. My advice to (start ups that don’t have a year’s worth of money in the bank) would be to raise money by reducing your own spending. If you can’t raise more money, you have to cut costs. And that’s what I’m harping on to my companies.”

Vancouver’s own Lyal Avery had some pretty insightful words to say in the comments:

“With all respect to Mr. Conway, I think it’s dangerous advice to tell people behind startups to “not quit their day job.” In my opinion, economic downturns are the perfect time to get started – the conditions are better than during a boom. Labour is cheap, distractions are minimized, and a lack of over-abundant investment means the business models produced can weather future storms. “
What do you think is going to happen?  When do you think the market will return?  Is it actually prudent for investors just wait and see?  or Are We All Doomed?!

One Comment

  1. Daniel Gibbons / Oct 8 2008 8:01 am

    We’re definitely not doomed, but “buy low, sell high” needs to be explained a bit. For years investors have been told that “buy and hold’ will always deliver strong returns for equity investments.

    However, the much longer term trend doesn’t support buy and hold at all. From the 60s to the early 80s, investors could quite easily have turned $1,000 into $800 by making apparently conservative and safe investments in publicly-traded equities. I think we’re heading back to those times.

    Also, when Warren Buffett looks for bargains, it’s important to understand that “cheap” and “cheaper than yesterday” are not the same thing. I’ve heard lots of people saying that GOOG and even AAPL are great buys now that they are “cheap”. But the truth is there is probably further to fall, and you can almost never make money by picking even the very best companies in declining sectors.

    IMHO, the smartest investment strategy right now is to look for sectors that, despite the carnage everywhere else, are holding firm. And to use technical analysis of buying vs. selling activity and volume. And then to blend this with common sense — invest in companies that have strong cash flows that are generated by recession-proof products. That doesn’t include much that’s technology-related; instead I’d buy J&J, for example, even though at first glance it looks like it’s not a “bargain”.

    With regard to early stage investing, it’s only logical that investors shift their focus to late stage companies, since they are more likely to be able to benefit relatively quickly from a liquidity event with a good, if not stellar, return. That’s not to say that the best opportunities aren’t potentially in early stage, but rather that for many investors now is not the time to be looking at 20:1 odds of success.

    All of the best tech. companies I can think of went through their start-up phase in tough economic times, but at the same time anyone who has a high paying job in a stable sector would be crazy to leave for an idea-stage start-up. Which is why crazy people are often very successful.

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