Source: Pixabay

Dear Diary,

The Dow lost 315 points on Friday – a nearly 2% plunge.

It is bound to happen sooner or later: US stocks will enter a bear market.

Nothing can stop it. Nature and the gods command it. The Dow will fall as much as 1,000 points in a day.

Then we'll see if our analysis is correct…

We believe the Fed will be unwilling to stand back and let markets be markets. We believe it will step in with more stimulus… and probably bring on the wildest, craziest stock market extravaganza we've ever seen.

Whether that happens sooner or later, we don't know. So let's continue our discussion of the big picture… and why we think the Fed must stick with its game plan.

How to Build a “Margin of Safety”

Endless discussion, books, reports, theories and blah-blah have been devoted to the subject of markets' cyclical moves… and the role of human psychology in these cycles.

For our “crash course” let's just remember that markets don't make it easy for us.

When markets look their best, they are often most treacherous. When they are forgotten, neglected and held in contempt, that is when they are most likely to give you “positive beta” (the kind of investment return you get from being in the right market at the right time).

In that sense, markets are like individual stocks or bonds. You are better off buying them when they are cheap.

Your analysis of the company may be right or wrong, but the low price gives you what the father of value investing, Ben Graham, called a “margin of safety.”

The bigger your margin of safety – the gap between the price you pay and your estimate of intrinsic worth – the better.

But let's now turn to the macro backdrop of today's financial world…

Since this has been the focus of our interest for so many years we are tempted to write a book about it. But we already did. Four times. Readers warmly received the books; elite economists and policymakers have not so much as acknowledged them.

In the interest of full disclosure, our analysis of the macroeconomic situation is at odds with a long list of Nobel laureate economists and powerful opinion makers – Krugman, Summers, Bernanke, Yellen, Stiglitz, et al.

The list is so stellar that you will have to ask yourself at some point why you bother to listen to us at all. But we accept the question. We are in a small minority. And the burden of proof lies squarely – if a bit uncomfortably – on our shoulders.