Lately, there's been quite a few questions about the current state of the markets. I'm reminded of the story of Bernard Baruch, who sold his stock holdings prior to the 1929 crash because he recognized signs of extreme market speculation and overextension. While popular legend often attributes his exit to a single encounter with a shoeshine boy giving stock tips, Baruch's decision was actually based on several analytical and psychological factors. Readers may ask AI to provide further information.
One day in July 2000, I was shopping at a Tip Top Tailors store and happened to overhear a store clerk giving financial advice to another customer. He urged the customer to buy Nortel stock immediately! As we know, Nortel's stock peaked at $124.50 on July 26. 2009, and last traded at $0.185 on June 26, 2009 when it was delisted from the TSX after its bankruptcy.
I appreciate your calm and rational approach, but must admit that I'm becoming more concerned, especially when great stocks like TRI are being so severely punished.
Your insights are always greatly appreciated.
We think framing the 'risk' here is helpful. In most cases of stocks that are in a drawdown, there are still very real, profitable, and growing businesses with strong balance sheets and years of proven operating history. Even if some names are exposed to disruption risks, these are real businesses with real cash flows and the businesses will not be displaced in the short-term. So, with this we can at least remove a tail risk with a degree of confidence that we will see some sort of major market event or 'Nortel' risk in these companies.
The question or risk really becomes what multiple is deserved given AI concerns. Of course, since the degree of disruption remains a major question and we are arguably not actually seeing this in results yet, no one can really answer it with certainty. This is the debate, in our view, that is weighing on many shares right now. Markets are 'debating' what degree of disruption certain companies and verticals might be exposed to and what the right valuation is given the odds of those risks coming to fruition. Now, in a lot of cases we do think markets are overreacting but 'react first ask later' has become more common in markets for right or wrong.
Making a long story short, we don't think it is an existential issue in most cases but it is more about, given the uncertainty in the short-term, are markets willing to reward a company with a 30X multiple or an 18X multiple or somewhere in between. If a stock re-rates to 18X (we are using random numbers here), it can still get back to past highs as long as fundamentals continue to grow but it will just require a bit more patience than the stock that re-rates to 28X.