A Clash of Investing Generations

 | Sep 20, 2013 | 5:00 PM EDT
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I confess that I have at least a mild addiction to Twitter. If you set your stream up correctly you have an interactive ticker tape during the day, a fairly reliable source of breaking news as well as a constant flow of information about critically-important stuff like books, baseball and wines.

There are some smart, witty folks using Twitter and I get a kick out of it. My stream is full of market-related people. Because of friendships with many traders,  I see a lot of the thoughts and alleged insights of individual trader types.

When Carl Icahn said that the stock market was generally overvalued,  these folks went ballistic. It seems the old gray beard is out of touch and should be following this guy, or that girl, to learn how markets really work. This crop of post-2008 traders has no idea of a market that can do down, and they probably have throw pillows and tattoos the read "BTD."

They have bought every dip for the past several years, and that's has been a definite money maker. Valuation is of no concern as long as you have betting slips that read Apple (AAPL) to win and Google (GOOG) to place. Don't fight the Fed is the law of the land, it seems, and us old guys are hopelessly out of touch.

I have enough gray in my hair that I have seen this movie before. Remember when Warren Buffett was hopelessly out of touch and uniformed back in the late 1990s and just didn't get what the market was really all about? His share and net worth have more than tripled since then while his critics are back at their day job trying to earn back the money lost day trading the new paradigm. Given another decade or two, they might get there.

If you step back from the day-to-day noise,  you will discover that the old gray beards that have been around decades are more than a little worried about where the market is relative to earnings and the economy. Sam Zell called it a game of musical chairs, Zell said it reminded him of housing in 2006 when prices refused to drop and everyone was trying to get all in on the fun.

Charles De Vaulx said at the value investing conference this week that he views the U.S. as mired in a slow recovery, and that stocks seem fairly priced. George Soros is reported to have purchased about $1 billion in put options in a bet against the S&P 500.

Seth Klarman of Baupost has one of the best track records around, and he has been saying for some months now that we are living in dangerous financial times. At a private meeting earlier this year, he is quoted as saying, "Equity investors who have embraced a momentum strategy are ill-prepared for a policy change that could reverse the market's artificial gains."

Klarman is reported to have said that markets could drop as much as 30% when the Fed begins to try and stop the taper program. We dodged that bullet this month but we all know it is coming at some point.

Even Buffett is showing his age. He told CNBC that the stock market seems fairly valued to him. He said:  "We don't find bargains around but we don't think things are way overvalued, either. We're having a hard time finding things to buy." While not exactly condemning the current market condition, it is not exactly a ringing endorsement either.

I have pointed out several times in the past couple of months what is going on in the private equity world. I think at some point the quote of Leon Black of Apollo that conditions are perfect for selling will go down as the ringing of a big bell. Several top private equity investors have made comments in recent months that it was a great time to sell, and they were having trouble finding assets cheap enough to buy right now. They are not just talking, either, and the IPO calendar is full of private equity- backed deals.

I am now old enough to have seen the genius whippersnapper traders come and go over several cycles of the market and economy. It is the same each time. The old smart guys begin to get nervous and sell long-term assets bought in the last panic, and the young guns deride them as out of touch and unaware. They get even more confident as the markets move higher for a period of time, but then inevitably the rug comes out from under them. To meet their margin calls they sell their stuff to the old guys who have magically reappeared with the cash they saved by selling.

Does anybody really think it will be different this time and that it is intelligent to bet against guys who have made billions in the markets? I am not saying run out and sell all your stocks, but if the gray beards are nervous you should be as well.

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