Dislocation and Time Horizons: September 19, 2008
By Mark Oelschlager, CFA
These are nerve-racking times in the market. I don’t think I’ve ever seen a week like this one with such wild swings. Such volatility can cause a lot of head scratching and test one’s sanity. Throughout the years, when there have been times like these, we have always stressed the importance of keeping things in perspective and maintaining a long-term focus. This time is no different.
When the stock market experiences such volatility, or when certain segments of the market have their relative positions change dramatically, this is sometimes referred to as market dislocation. This seems to be more common recently, partly as a result of the financial crisis and the uncertainty in the market, but also due to the nature of today’s market participants. As technology has developed, it has made information more easily available for investors and speculators, which has been a large contributor to their shrinking time horizons. The reduced time horizon of market participants is reflected in the statistics (average holding periods for stocks have dramatically declined), the nature of market participants (such as the growth of hedge funds), and the financial culture (instead of “Wall Street with Louis Rukeyser,” we have more trading-oriented television programs like “Fast Money” and “Mad Money”).
Given this, one’s instinct might be to question whether a long-term investing strategy still makes sense. After all, the ability to adapt is one of the most important, if not the most important, survival traits. So it may be counterintuitive when we contend that not only does a strategy of focusing on the long-term still make sense, but one who employs it is at an even greater advantage in these times.
Why is this? Well, the market generally does a pretty good job of valuing companies (stocks), by weighing their future prospects. The market certainly isn’t perfect, but on the whole it is relatively efficient at pricing stocks – which is what makes this business so tough, since successful investing is all about identifying opportunities that the market is either not seeing or is underestimating. But when the market is volatile, causing various segments/stocks of the market to change their relative position dramatically for no reason other than short-term panic, it creates opportunity for long-term investors. As long as one can tolerate the emotional ups and downs of a volatile market, an investor should actually welcome such volatility. In this business, the more managers that employ a strategy, the less chance it has of being successful, so the increased short-termism in the market we believe increases our chances of success.
We want to clarify that the wild ride in the market this year and the crash of multiple financial titans is not simply a matter of short-term panic. These companies had real problems. But the accompanying market action, with some sectors and stocks swinging wildly in and out of favor, is what has led to opportunity for long-term investors. We have taken advantage of this in our portfolios by taking action in specific stocks. At the same time, we have avoided many of the landmines in the financial sector, such as Countrywide, Bear Stearns, Fannie Mae, Freddie Mac, Lehman Brothers, and Washington Mutual.
Percent weighting of the following holdings in the Funds as of 9/19/08 were: 0% Countrywide, 0% Bear Stearns, 0% Fannie Mae, 0% Freddie Mac, 0% Lehman Brothers, and 0% Washington Mutual.
We continue to focus on creating a portfolio of attractive long-term holdings that will reward investors for weathering these turbulent market conditions.
Mark Oelschlager, CFA
Oak Associates, ltd.
This manager commentary represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice.
Current and future portfolio holdings are subject to risk.