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You are correct about the number of participants during downturns tends to decrease and ownership concentration increases. There is an old phrase amongst investors which speaks to this, “the passing of ownership from weak to strong hands.” As prices decline value investors begin to enlarge their holdings as others sell out. The bottom of large bear markets occur when the market is dominated by value investors who do not care about price momentum and economic factors, but only that the stream of cash flows that can be delivered to investors over time is quite high.

Or, as my partner says the real winners in the markets are those who have enough money to buy when things get really bad, not who does better in any given year. We strive to be those people, and are prepared to be patient until then.

What is more important in my opinion is low volume, which means that the people in the market are just waiting … What  may also be true (how can this be checked), is that the total number of participants who own stocks could be decreasing, so that the market is “owned” by less and less people/institutions, who own a larger and larger share of th e market. At any time, the volume could increase, upwards or downwards.

I, for one, am willing to forego 5-10% in these uncertain times.

Gordon

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Re: the second – given that I have had numerous discussions with several respected minds that fall on either side of the deflation/inflation debate, I am concentrating on individual names which will do fine in either environment. My favorites right now are NVO and ATRI.

Were you asking what I do personally for a living? Or what one is to do in this investment environment, given the divergence in ultimate outcomes for overall markets that depends on the highly uncertain emergence of inflation or deflation?

However, I do believe that we face inflation down the road due to the increase in spending by the government. As deleveraging slows (probably in 2013) the vast increase in government issued liabilities will lead to inflation. That is down the road.

That doesn’t mean the size of the monetary base relative to interest rates isn’t worrying to me, it is. Small changes in interest rates could lead to wild swings in demand for financial assets as John Hussman has shown. This can lead to volatility in inflation and interest rates that could be very destabilizing. However, in terms on average inflation over time it is the amount of government issued liabilities that worries me, not what form they are held, which is mostly what the Fed controls.

Great discussion guys. Some great points all around. I am sure we will all have to adjust our views on these questions over the next few years as outcomes test them stringently.

Pacioli, what do you do?