Investors, markets in November doldrums

The lackluster trading of previous sessions continued over last week and into this week as investors drift along this mid November in the mid quarter doldrums. There has been a measure of profit taking and repositioning but in general, investors are waiting for the quarter and year to near its end. We would expect renewed interest after the US Thanksgiving Holiday next weekend. The Dow Jones industrial average and the Standard & Poor’s 500 fell modestly against some concerns over the recent increase in terrorist attacks in Iraq. The DOW fell 0.4% or 41 points to close at  9768.7 whilst the S&P dropped only 3 points to 1050.4. The NASDAQ was the big loser for the week in the US markets, losing a little over 2.1 percent, to close down at 1930.3. We note also, that the world’s currencies have started to wander  back toward the longer term exchange rates necessary to balance each countries’ respective foreign trade position. It may be setting the  stage for another false rally in the US Dollar towards year end as  interest in the financial markets and year end economic data picks up.

The global recovery led by the US will undoubtedly attract foreign capital investment as leading US economic indicators confirm the US economic recovery is more advanced that other leading    industrial nations. During this slower time in the global market place, I thought I would spend some time discussing the fundamentals of value, especially against the background of the recent upsurge in Trinidad  and Tobago real estate prices. Although the principals of value investing hold true with all financial investments, real estate  seems one instrument that people can identify with easier. The first component in the value of anything is the fundamental value. For example, the fundamental value for a house would be what  the raw land is worth in that area (based on recent past average  sales) plus the present value cost to build that exact house as it  is standing. On top of the fundamental value, in a free, fair and efficient  market place, you have to superimpose the second issue of premium vs. discount to arrive at a figure that both the seller and the buyer agree on. A review of most real estate transactions would show  that the selling price is not the fundamental value. Invariably, the value would carry a premium or a discount off of fundamental value to compensate for the mitigating factors which always have a bearing. For example, one might have to discount the price due to a poor location, or leaking roof. Alternatively, a choice lot might get a premium. To be successful at investing, you need to understand  both fundamental value, knowing what it is worth and also the  premium/discount value. A successful investor can read the financial climate to estimate a reasonable premium/discount factors to their  favour.

A value investor always buys undervalued positions and holds them  until others realise that value and are willing to pay it. Value  investors never speculate, as the fundamental decision is always based in quality. Given the rapid rise in real estate in say Diego Martin, where regular small apartments are now selling for over $500 per sq ft plus real estate costs, one can see the premium to get into Diego right now is very high, likely between 30% and 50%. A reasoned investor would have to satisfy himself as to how such a high premium will auger over the next few years before spending that  kind if extra money. A value investor would not be able to satisfy investing at this time. Even though some people have a good sense for understanding the current financial climate, it is impossible to predict the feelings, emotions or mitigating factors of people’s perceptions of  worth categorically using fundamental data.

That is because the fundamental data, although a factor in determining value is in fact mutually exclusive from the emotional determination of value. Over the long term, fundamental trends rule and determine the average,  but not on each transaction. However, whether the trend is above  average or below, one has to measure the feeling of investors to  look forward and that is impossible. Best you can do is guess based on a sense of everyone else’s current beliefs. Moving forward, we continue to advocate investment with a bias  toward equities. The recent slow down in interest and stock prices has opened the door to getting better value using fundamental stock selection (bottom up) practices. We also continue to believe a value-based selection process is favoured over the near term.
darcy@investments-intl.com