Know when to bet against the panic.
Benjamin Graham, the investor who taught Warren Buffett, introduced Mr. Market in The Intelligent Investor, first published in 1949. Imagine a business partner who arrives each day offering to buy your share or sell you his. He names high prices when he is exuberant and low ones when he is afraid, even when little has changed in the business. You can decline either offer. Tomorrow he will return with another price. [8][9]
Buffett carried Graham’s character into his 1987 shareholder letter: “Mr. Market is there to serve you, not to guide you.” He wanted investors to judge the business, then decide whether the price made sense. A year earlier, he had described his aim as being “fearful when others are greedy and to be greedy only when others are fearful.” He also said he could not predict when either mood would arrive or how long it would last. [8][10]
Tepper’s bet on the banks.
In February 2009, bank shares were collapsing on fears of a government takeover. David Tepper, founder of the hedge fund Appaloosa, made his living buying troubled businesses. This time, he needed to understand what rescuing the banks would mean for their shareholders. [1]
Capital Assistance Program
The government’s investment could convert into ordinary bank shares. The price for that conversion used an earlier trading period:
90% of the average closing price over the 20 trading days ending February 9.
The gap Tepper noticed
By February 25, the banks’ market prices had fallen below the proposed conversion prices. Converting government capital at those higher prices would give Washington fewer shares for its money. Tepper read that as a sign that private shareholders would survive the rescue. Treasury had explicitly favored private ownership two days earlier. [1][2]
He acted before the panic passed.
Appaloosa began buying common shares, preferred shares and bank debt, including investments in Citigroup and Bank of America. Tepper put money behind his reading of the rescue while investors were still afraid of nationalization. [1]
The recovery helped his flagship fund return 117.3% over the nine months ending September 30, 2009. [1]
“Everyone has the brainpower to make money in stocks. Not everyone has the stomach.”
Peter Lynch · longtime manager of Fidelity’s Magellan fund [6]
The stomach came from preparation.
That same February, Charlie Munger and Rick Guerin were buying bank shares for Daily Journal, a newspaper and software company. [3][4] Munger, Warren Buffett’s longtime partner at Berkshire Hathaway, was its chairman; Guerin, a fellow investor, was its vice-chairman. [3][5] They put cash previously held in Treasury securities to work during the panic. [7]
Munger later explained where his courage came from: he already knew the banks. He named Bank of America, Wells Fargo and U.S. Bank as businesses he understood, and he had cash available when the opportunity arrived. Tepper had studied the rescue; Munger had spent years learning the businesses. Each had a reason to buy while others were afraid. [1][4]
Market Mood gives you a recurring read on the crowd: six indicators, their changes and a short summary of where they agree or disagree. Keep the market’s mood in perspective while making your own investment decisions.