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2 SPEAKING
FREELY How to save your skin and
profit By Doug Wakefield
Speaking Freely is an Asia Times
Online feature that allows guest writers to have
their say. Please click hereif you are interested in
contributing.
On January 2, 1900,
the Dow Jones Industrial Average closed at 68. If
you had told those living at that time that in one
generation Americans would be driving automobiles
and that the world would be looking back on a war
in which the Allied Forces consumed
12,000 barrels of oil a day,
who would have believed you? On September 3, 1929,
the Dow closed at 381. If you had told those
living at that time that on July 6, 1932, the Dow
would close at 44 - lower than its value on
January 2, 1900 - who would have believed you?
After hitting 991 in January 1966, 13
years later, in August 1979, the Dow closed at
885, and Business Week wrote a piece titled "The
death of equities". If you had told those living
at that time that the next generation would be
surfing the Web from their personal computers, who
would have believed you? Who would have believed
that median US home prices would go from US$64,000
in 1979 to $257,000 in March 2006?
On
February 20, 2007, the Dow closed at an all-time
high of 12,786. One week later, the Dow saw its
worst one-day loss in seven years (outside of
September 11, 2001). So, was February 27 a
worldwide wake-up call for investors or just one
more bump on the road to higher markets? While we
wait to see what happens, we must contend with the
fact that, collectively, we have a poor track
record of foreseeing substantial changes in the
future. Time and again, history shows the
circumstances that have led to manias and the
attendant aftermath of these episodes.
In
fact, the record is so replete that we must
consider how large a role denial has played in
financial history. The headlines and media
coverage after Tuesday, February 27, only serve to
exemplify this trend.
In 2005, I dedicated
five months to a topic that I think will be
historically significant in the near future and in
generations to come. Though it has been around
since the 1640s, little has been written on this
topic. And, while many institutional players have
had access to this tool through the hedge-fund
world, few people actually understand its value to
investors. The topic? Short-selling.
As
recent events have caused some to consider the
possibility that markets have a downside, I've
decided to take this opportunity to revisit one of
the managers I interviewed for Riders on the
Storm: Short Selling in Contrary Winds.As
attested to by the Strunk Short Index, Robert B
Lang, chairman and chief executive officer of Lang
Asset Management, is one of seven dedicated
short-only managers in the US at this time.
I recently had the opportunity to ask Lang
the following three questions:
Doug: Bob, dedicated
short-sellers are extremely rare in our financial
markets. Can you share some of your background and
perhaps some of the experiences that led you to
establish a short-only strategy?
Bob: I started in the
business in 1959, have managed portfolios since
1964, and started my own firm in 1980.
I
remember when the markets were bottoming in the
mid-70s ... I remember calling prospects and
telling them P/E [price-to-earnings] ratios were
down to 7 or 8, dividend yields were better than
6%, and that the market had likely bottomed, so I
thought it was a good time to start buying. There
was absolutely no interest. Most people responded
with something to the effect of, "I don't want to
touch the stock market. All it's good for is
losing people money." Well, times have certainly
changed.
Though I have historically
operated on the long side of the markets, during
the latter part of the 1990s, I could tell that
the activities on Wall Street were becoming much
more speculative. Security analysts were no longer
performing their traditional roles as independent
thinkers. They would just take the information
given to them by the companies they covered and
parrot it. Also, since they had been given a
boatload of options, many corporate executives
were primarily interested in hyping their stock by
making overly optimistic predictions. To boost
performances, mutual funds acted in ways that were
not in the best interest of their fundholders.
In short, Wall Street lost its way in a
bullish tsunami. Since I had experienced multiple
investment cycles and had witnessed how investors
swing from greed to fear, it became apparent that
a significant opportunity was developing for
contrarians. That is, it was time to move to the
short side of the markets. Of course, since we are
all products of our experience, and since most
participants have only experienced stocks going
up, a bearish view was, and is, extremely
unpopular. Only a handful of investors understand
the bigger picture. Stocks are subject to cycles.
That is why long-term cycles occur. That is, one
generation grows up with the understanding that
stocks always rise. Finally, the market declines
and a lot of people get hurt and the next
generation look at stocks with contempt. So unless
individual investors are made aware of this
pattern, they are inclined to go along with the
current prevailing opinion. After the fact, that
is, once a decline unfolds, that decline becomes
obvious in hindsight. But until then, most find it
extremely difficult to "fight the crowd".
Doug: Since most investors
have no experience with short-selling, can you
give us some basic lessons on how short-selling
works?
Bob: Most investors
buy stocks hoping that the price will rise. But
short-sellers, like Lang Asset Management Inc,
anticipate
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