FURTHER UPDATE Tom Faranda's Folly: Investment Advisor Ken Fisher on missing calling the bear market.
UPDATE: Quote from Ken Heebner, very successful fund manager: Tom Faranda's Folly: A savvy prediction by a money manager: "You're going to see the biggest short term rally in my lifetime"
The current panic, which MAY have ended today, has seen an over 18% drop in the U.S. financial indexes this week, and even more damage done in overseas markets FT.com / In depth – Market crash shakes world and Bloomberg.com: Worldwide and Major World Indices – Yahoo! Finance .
TraderFeed: The Financial Panic of 2008
Since the Great Depression era, we've had panicky periods of selling, but no labeled "Financial Panics". Panic, psychologically, connotes a loss of orientation and an overwhelming sense of anxiety, just as Depression connotes hopelessness and an overwhelming sense of loss.
It is interesting that we use these psychological terms to label periods in financial history, but it is fitting. When institutional investors lose confidence in the financial system, what else can they do but hit the panic button, sell their assets, and do their best to preserve capital? When individual investors see their retirement assets–from their homes to their bonds to their stocks–down more than 20% and in seeming free-fall, it's understandable that psychological depressions become financial ones.
Brett Steenberger, author of "The Psychology of Trading"
One year and one day ago, the major U.S. indexes – the Dow Jones Industrial Average and the S & P 500 – hit all-time highs. Today they closed more then 40% below those highs. And there are no clear answers as to why this sudden and dramatic fall occurred.
While it's easy to see that the match that lit the fuse was the sub-prime mortgage lending collapse in the U.S., it's much more difficult to see why this turned into a worldwide drop in equity values, amounting to over $25 trillion in losses. I believe there has to be a more systemic reason, but I certainly don't know what it is! Over-valued real estate worldwide? The rise of commodity prices (especially oil) as worldwide demand accelerated (of course commodity prices, esp. oil have now crashed)? Too much global debt? Some vague dislocation between the worldwide free market system and people's needs? A little bit of all of these things?
I dunno. And neither does anyone else – it will take years to sort through.
Economics and investing are subject to human nature. It does seem to me the panic, which was very clear Wednesday and Thursday, was institutional, and not the individual retail investor. At least that's my experience. My clients, to a person, have acted rationally and not panicked. Perhaps because they know what they own and why they own it, and are not over-extended in stocks. No one is going to have to sell positions at 40% losses to pay the mortgage, or send kids to college, or take a vacation.
Nevertheless, there is pain, watching major positions shrink in a matter of days.
So what's the game plan? DO NOT TAKE THE FOLLOWING AS INVESTMENT ADVISE. It's merely my musing.
I am quite sure there is going to be a global business slowdown/recession, but that doesn't mean that a 40% drop in stock values is warranted. Panic takes things to extremes. As the credit freeze is unwound and confidence is restored, there will probably be a mild rally. A mild rally. It will certainly be several years – maybe quite a number of years - before the Dow gets back to it's old high over 14,000. And in the short term, sure, the markets could go lower. But companies like Coca Cola, Procter and Gamble, Boeing, Exxon-Mobil, Budweiser (Recessions can be good for beer brewers – people downgrade from scotch and vodka to beer! Yuk, yuk, yuk.), aren't going out of business.
So today I moved some of my retirement money (which I don't have a lot of!) out of a fixed account into two stock funds. I usually have my account split 50-50 between stock funds and the fixed account, and of course now that's out of whack with the fall in the stock funds. So to re-balance I moved about 8% over. And I expect to move more over, and get the balance a little more then 50% in stocks. I just think that after a 40% drop the stock market should move higher over the next two to four years (regardless of who's president). After a panic and big drop, I am "buying low".
Again, things certainly can go lower in the near term, but this is not the end of capitalism and free markets, and as the world works it's way out of a recession, company earnings will rise and stock prices go up (Old saying: "Money follows earnings"). As I said above, economics and investing are subject to human nature, and that's how it's worked in the past.
So that's my thinking in a nutshell, and "This Bud's For You".
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