On Current Market Conditions

Many have talked to me over the past two years about investing in the Saudi Stock Market. Our company, Yareem, Ltd., has a total of $0 invested in Saudi stocks as of this second, and this has been the case since the inception of Yareem’s predecessor, TwentyEight, Inc., in May 2003. The question I am starting to hear now (either explicitly or implicitly) is whether or not I regret not investing in Saudi two years ago, given the fact that the market has performed so well. Of course the question becomes even more important as the year approaches its end and I have to deliver my annual report to our shareholders. Being a value investor my answer remains no, even if the market doubles from its current levels and even if the US and UK markets (where we’re currently investing) remain flat, as has been the case in 2005. The reason I wouldn’t invest appears so simple for me (and probably so absurd for others)--I don’t like current valuations--although I may have had trouble explaining it in words. I usually look at the history of financial markets around the world for lessons that I can apply to the future. In my studies I came across the following quote and it probably captures most of what I want to say:

I am out of step with present conditions. When the game is no longer played your way, it is only human to say the new approach is all wrong, bound to lead to trouble, and so on. On one point, however, I am clear. I will not abandon a previous approach whose logic I understand (although I find it difficult to apply) even though it may mean foregoing large, and apparently easy, profits to embrace an approach which I don't fully understand, have not practiced successfully, and which possibly could lead to substantial permanent loss of capital.

Warren Buffett, in a letter to his partners in the stock market frenzy of 1969.

Whenever I mention that point, I get a typical response, so here’s another quote, also by Warren Buffett, that addresses that typical response:

The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs. Nothing sedates rationality like large doses of effortless money. After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball. They know that overstaying the festivities - that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future - will eventually bring on pumpkins and mice. But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight. There’s a problem, though: They are dancing in a room in which the clocks have no hands.

Berkshire Hathaway 2000 Annual Report, Feb 28, 2001