Two weeks ago, I attended the Value Investing Congress in New York City, and was fortunate to listen to quite a few very successful value investors. I also was able to meet speakers and other investors to learn more about their approach to investing in the current turbulent stock market. The experience was very enlightening, and I came away with some valuable insights that I want to pass along to you.
The Congress started with a detailed presentation about the recent history of mortgage lending and the events leading up to the financial crisis currently gripping the U.S. and many other countries. I could write several pages about the details presented, but I think I can simplify the events for you with the following summary: Consumers bought cars, homes and luxury items that they could not afford. Lenders provided loans with ridiculous terms. Wall Street invented highly leveraged securitized investments backed by mortgages and labeled them “high quality,” even though they were very low quality. Regulators eased the rules and restrictions at a time when rules should have been tightened. The result was a perfect storm.
According to investors at the Congress, mortgage problems and home price declines will continue for quite some time. Only half of the adjustable rate mortgages have re-set to higher interest rates, which might indicate that the decline in home prices is only half over. The average home in America might decline a total of 30%. Home prices will likely move from an overvalued condition to undervalued.
The amount of time needed for the decline in home prices to run its course is anybody’s guess. The consensus of opinion at the Congress was that another two to three years will be needed for the housing market and the economy to wash toxic mortgages through the system. Americans will need to adjust their spending habits to start saving more of their income, rather than spending more than their income. Banks will need to lend to consumers who can clearly afford to repay their debts. More regulation will be needed to meet the problems that new investment products can create.
What does all this mean for the stock market? As the economic and financial problems get worked out during the next few years, the stock market will continue to be volatile–hopefully not as volatile as the past few weeks, though. For value investors, it’s now time to buy. The current low prices come along only once in a lifetime. Warren Buffett said it best: “Bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.”