Mr Bear Goes Into Hibernation

Finally the bear in me has been re-educated. It wasn't enough to endure multiple months of rising markets and declining net worth, my mental tenacity saw to it that my views were sufficiently entrenched to remain inflexible in the face of bullish market signals. Nor was it enough to know all that I'd written on since December last year. Not even the extensive knowledge of Value Investing principles from Ben Graham, Warren Buffett and Charlie Munger's writing would see to it that my investment decisions would be wise and profitable in what may amount to the best year in my working lifetime for investors to clean up without so much as breaking a research-based sweat.

How close was I, intellectually speaking, to becoming the man that I know I have the potential to be? How could I write in January that, "I have stocks picked out to research further, and ideas to progress. The speculation continues, but it helps with my markets education. I still think the best risk-reward lies in Value Investing. To time it right, I want to be bottom fishing with the tide firmly out."

Then to see the tide fall further from the shore in March than it has been since the mid-1970's - before I was even in existence - and not be focussed on the knowable and predictable rather than the unknowable and unpredictable.

The answer lies in human fallibility and the difficulty of being a contrarian when it really matters. An education can sometimes be expensive, but experience can be one of the best educators out there. It's massively frustrating to have had the time, energy, capacity, tools and capital to have profited immensely in a low-risk manner from the market's disconnection from reality earlier in 2009, but the outcome I've ensured by remaining a bearish speculator in a surging equity market is to have depleted the capital (and confidence) that could have been compounded by now into something reasonably impressive and transformed my hopes and dreams one large step closer to reality.

Here is what I wrote whilst at Octopus Investments in August...

"I'm more in the mini-bull market camp now, having arrived here still quite bearish at the start of last week. The whole scenario just feels extremely similar to 2003 - the lows in March, and the 'climbing a wall of worry'. Huge monetary stimulus finding goods and services to buy and pushing profits up. Sadly at the cost of future tax burdens and the deferral of necessary pain.

Also, whilst it feels like the Great Crash scenario was a possibility, this has now been averted (or postponed?). There's a necessary downward revision of profits as a proportion of GDP to come and that will be brought about by the rising costs of inputs to the economy in the form of imported commodities and finished goods from countries with rising currency levels. Inflation figures reported by governments don't represent real inflationary costs to consumers, so inflation may appear more subdued than it actually is.

At some point, I think that the Russel Napier scenario of rising markets being pin-pricked by the collapse in government debt values and the staving off of inflation by central banks as a highly likely scenario. But it is not imminent.

Overall, it seems eminently possible that profits could rise for a year or two only to fall back to 2008/9 levels (or worse) as the cost of risk free debt causes leveraged companies and consumers to retrench more fully or pushes them through their breaking points. I can see multiples remaining at current levels (15x or so) and profits rising by 25% or so ($60 to $75 per share on S+P), similarly to 2003 (but not to the same extent). Hence a 25% rise in the index as an upside risk.

As the bear market got going in 2008, I felt quite certain that we were looking at a repeat of 1929, with a 50% rally expected, to be followed by further, more aggressive falls. Now, I'm feeling quite certain that the worst was averted and a mini-bull market is going on. The major risks to this scenario are unexpected inflationary/deflationary pressures that suppresses earnings multiples and corporate profits. Over time I would expect these problems to be close to inevitable, with the S+P Index breaching it's 2009 lows. However my view that this would happen in mid-2010 is now revised to around mid-2012."

Whilst the above shows that market directional agnosticism has not yet been achieved, it also shows a view that is less ardently bearish than in times gone by. Fortunately, coupled with the above notions were some actual analysis of potential investments as part of the work supporting the fund manager at Octopus. And from these ideas a portfolio was born. All the investments I've made will be published here with prices at inception as a means to review the decisions at a later date, and hopefully as a record as to the methods and execution that will pave the way to future success for me as an investor, leaving behind a few years of volatile speculative activities and changes in fortunes that do not a potential Managing Partner in an Investment Partnership make.