While most investors were dumping stocks across the board early last week, The Economic Times of India reported that billionaire global investor George Soros had gone on a buying spree in the Indian stock market. Soros’ Quantum fund has invested close to $140 million in India since February and has picked up the pace of its purchases during the past couple of weeks. In placing his bets in a high risk, highly volatile market such as India, Soros is trying to do what very few investors do successfully — which is to pick the bottom of a bear market. Granted, $140 million is not a huge bet for Soros’ Quantum Fund. But it does signal a shift in the thinking of the granddaddy of hedge-fund managers.
Nor is Soros alone in apparently betting that the current global financial crisis may be turning. The chairman of Deutsche Bank said Friday that the credit crunch was "at the beginning of the end," thanks to banks and regulators who had taken action to deal with the crisis. J.P. Morgan’s investment banking division recorded its second-best quarter ever as the bank as a whole reported better-than-expected results last week. In addition, a number of other U.S. financial institutions have reported better-than-expected financial results during the past week.
George Soros Turns Bullish: Is the Market Rally For Real?
The question remains whether the current turn in the markets marks the beginning of a sustained rally. The bulls are trotting out a whole host of arguments. First, high volatility in the market often signals a market turn, and the VIX, or volatility index, is trading around the 30 level. That’s near the peak it reached in March at the time of the Bear Stearns bailout — though it’s still less than the level of 40 it hit in 2002 and after the collapse of Long-Term Capital Management (LTCM) in 1998. Second, the dividend yield on some major markets like the FTSE All-Share (the broad-based British index) is approaching the yield on 10-year gilts, or government bonds. The last time the U.K. stock market yielded more than gilts was in March of 2003, marking the end of the 2000-2003 global bear market to the day. Third, many European markets — including Belgium, France, Ireland, Italy, the Netherlands, Spain and Sweden — are trading on P/Es in single digits. Even on Wall Street, stocks are cheaper now than they’ve been in more than a decade, with the Dow and S&P 500 index trading at forward P/Es of 12 and 13 respectively. Finally, market contrarians also pointed to a classic buy signal from Merrill Lynch’s survey which confirmed that as a group, global fund managers have been the gloomiest they’ve been in a decade and are sitting on record high cash positions.
Yet let’s not forget that there was no dearth of bullish arguments in the middle of March either. The collapse of a prominent Wall Street institution as well-known as Bear Stearns had been a reliable sign of a market bottom, as it was after the last four big Wall Street collapses (Continental-Illinois in 1984; Drexel-Burnham Lambert in 1990; Kidder Peabody in 1994; and LTCM in 1998). Market technicians also pointed out that the S&P 500 not only gained more than 3% for two days in a single week in mid-March, but also that 90% of stocks were up on those days as well. The last two times this happened within a space of a week was in July 2006 and November 1987, and both occurrences were followed by long and sustained market rallies. Finally, the Merrill Lynch survey showed the exact same thing in March as it did last week: that fund managers were sitting on record high cash positions and were as gloomy as they have been in a decade. Yet with the benefit of hindsight, it turned out that all these predictions were wrong.
Ply a Wall Street or City of London analyst with enough booze, and he’ll soon reveal that he can generate an endless number of convincing indicators that in the past have signaled the market will go in a certain direction — but then do not pan out in the future. That’s also why it’s so difficult to implement John Templeton’s advice to buy stocks at the point of "maximum pessimism" or the Rothschilds’ advice to "buy when there is blood in the streets." Market bottoms — like recessions — only are confirmed with the benefit of 20/20 hindsight. With thousands of market players, there inevitably will be a handful who get the timing right. Rarely will they admit, however, that they owe their success to dumb luck as much as savvy analysis.
George Soros Turns Bullish: Mr. Spock’s Built-In Advantage
As investors, we face two psychological challenges in calling market bottoms. First, we all see what we want to see. Bulls will trot out arguments for why the market is turning; bears will be equally convincing in arguing the exact opposite. Psychologists call this "confirmation bias" — an affliction from which there is no escape unless you’re "Mr. Spock" from the classic Star Trek TV series. Second, the relentless and painful head-fakes of bear-market rallies start to feel like a non-stop, live version of "the boy who cried wolf." By some measures, the market has survived no fewer than six separate "market meltdown"-style scares the likes of the threatened Fannie Mae/Freddie collapse during the last 12 months. It takes remarkable psychological stamina not to join investors who just throw up their hands in disgust, and become too exhausted to care. Again, Mr. Spock’s emotionless Vulcan approach would serve us best.
Finally, as good as it is to outsource your investment decisions, don’t put too much faith in George Soros’ call on India. By the time you read this, Soros may already have changed his mind. Only in January, George Soros declared the credit crunch "the worst market crisis in 60 years." Yet within a few months of predicting economic Armageddon, Soros is putting his money to work in high-risk, emerging markets such as India. But don’t hold this against him. Soros considers this willingness to change his mind as his single biggest strength as an investor. As he pointed out in an interview many years ago: "The secret to my system is not that it allows me to be always right. It is that it allows me to recognize when I am wrong." And the taste of that medicine is often too bitter for most investors, whether they are bulls or bears, to swallow.