Martin Capital Management commentary for the third quarter Q3 2014.
Dear Friend of Martin Capital Management,
Dr. Janet Yellen has followed in the footsteps of her predecessors, Doctors Greenspan and Bernanke, sedating the markets into drug-induced complacency with a prescription now known as the “Yellen put.” In recent weeks, however, the anesthesia seemed to be wearing off.
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Complacency ended abruptly at the close of the third quarter. The volatility index known as VIX, a popular quantitative measure of fear, spiked from tranquility to trauma, rising from 15 to 30. VIX levels that high last occurred in October 2011 during the only significant correction in this cyclical bull market dating back to early 2009. More obvious to most observers, the S&P 500 Index dropped 8% from the end of the third quarter (September 30, 2014) to the middle of the trading day on Wednesday, October 15.
For the vast majority of market participants who are by necessity fully-invested, these gyrations are cause for concern. Because of the ferocity of the decline, the deteriorating news backdrop, and the reality that the equity markets are seriously overvalued, these investors must be wondering whether this is simply a correction or, just perhaps, the beginning of something much more ominous. To MCM, on the other hand, market volatility signals opportunity. As circumstances warrant, we will send supplementary updates concerning evolving market activity.
In the meantime, our third quarter 2014 market commentary is attached for your review bearing the title “Why 1925?” Frank Martin posed that suspenseful question at the end of our Q2 letter (“Slaying Goliath”), citing the words of legendary value investor Benjamin Graham. The response may be properly viewed not only through the lens of history, but also against the backdrop of the all the present-day market commotion.
Martin Capital Management, LLC
Martin Capital: Why 1925?
The Martin Capital Management Q2 2014 commentary (“Slaying Goliath”) left readers in suspense. It closed with a cliffhanger question … and a promise that it would be answered in the Q3 2014 edition now in your hands or on your screen. The question: Why did the “Dean of Wall Street,”1 Benjamin Graham, single out 1925 (not the more fortuitous years of 1926–29) in the following quotation from the first edition of The Intelligent Investor published in 1949? It is worth pointing out that assuredly no more than one out of 100 who stayed in the market after 1925 emerged from it with a net profit and that the speculative losses taken were appalling.
Before attempting to answer the question posed above, we suspect you’ll want to know more about Ben Graham and why you should read what this man from an earlier era had to say. You will no doubt need to be satisfied that he was qualified to pen the words cited above 20 years after the great market crash. To close the link between then and now, let’s reflect on the relevance today of what Graham wrote to investors in 1949.
In an attempt to provide a balanced view, consider at the outset Graham’s presumptively most qualified and outspoken critic who recently held sway on the matter. Charlie Munger, 90, as most readers know, is Warren Buffett’s alter ego and comic straight man at the Berkshire Hathaway annual meetings. However, when Charlie is center stage and unshackled, he morphs into the saucy, outspoken curmudgeon we’ve come to love and admire. During an interview with The Wall Street Journal’s Jason Zweig at the annual meeting of Daily Journal Corp., the small publishing and software company that Munger chairs, Charlie gave his own candid assessment of the investment wisdom of Buffett’s mentor, Ben Graham.