Mr. Au: I'm primarily a financial writer on blogs such as thestreet.com, Seeking Alpha and others. I'm the author of a book called A Modern Approach to Graham and Dodd Investing that came out in 2004 and basically predicted the 2008 market crash. It was four years early, but ultimately not wrong.
I'm also involved with some other things like the private equity start-up that my friends and I have been working on for a little over two years now. It's a slow process and the process made slower by the global economic situation, but hopefully one of these days we'll actually launch the private equity fund, though that's for the future.
TWST: We are interested in how the last 12 months have been, and when we last spoke to you I think it was right after the collapse of Lehman Brothers and a lot has happened since then. Would you like to recap the 12 months?
Mr. Au: Actually, it was two years ago in the 2007 interview that I said, not only was the market overvalued, which it had been for most of the 2000s decade, but in 2007, unlike earlier years there was a catalyst, that catalyst being the collapse of the subprime lending bubble, which in turn would burst the stock market bubble.
That manifested itself in the early part of 2008 in the closing of several major investment banks of Bear Stearns, of Lehman Brothers, of what I would call the partial closing of Merrill Lynch, which remained open for business but was forced to merge with or be acquired by Bank of America.
When we spoke last fall, the collapse of the stock market was actually very much in progress. It had peaked just over 14,000. The Dow has peaked to just over 14,000 late 2007 and had been pulling back by stages to 13,000, then 11,000, I think it was 8,000 or 9,000 when we spoke, and the ultimate low in March of this year was 6,467, I believe. That's about where it should have been, because I had published 6,600 fair value calculation for the Dow in thestreet.com, in October 2007 using my proprietary investment value methodology. While no model gets it exactly right, for a number of years between 1932 and 1992, the actual value of Dow had pretty much tracked the theoretical value of the Dow, not exactly, but plus or minus typically 10% or 20%. Certainly, the difference between 6,467 and 6,600 was well within that 10% band. The market did not stay fairly valued for very long. We had a relief rally starting in March and continuing into the present. So what had been a fairly valued market, at least on the Dow, was now rebounding back into overvaluation.
Tickers included in this excerpt: ABX, ASH, BAC, CSCO, DD, DOW, ERF, GLP, HBC, HL, HPC, LCAV, NEM, NPK, PFE, TGT, WYE
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