Cool Heads Will Prevail

It's times like these that make you realize how tough this "game" can be. Selling in many sectors appears indiscriminate and there seems to be no end in sight.

Certainly there are some external factors contributing to the slide, not the least of which is the weak dollar. Although the S&P500 is still up 4% for the year in dollars, it is down 6% in Euros. Additionally, domestic equity funds have been experiencing huge outflows while international funds see massive inflows. As both domestic and international investors move away from US markets, the sectors that haven't been working (anything other than M-E-I-T) get hit harder and harder.

It is natural for the human psyche to extrapolate recent negative action into the future, especially when it keeps happening. It can be quite demoralizing to see things you own, and new holdings you add because they look cheap, continue to go down. Now more than ever, one needs to focus on the underlying businesses and long-term prospects of their stock portfolios, and avoid getting wrapped up in Mr. Market's mind games. Don't let him scare you out of high-conviction holdings. Remember why you own them in the first place, and use declining prices to average down. Sure, things may keep going down in the near term, but one day this will all be forgotten, and Mr. Market will suddenly start paying attention to your holdings' fundamentals. It could be tomorrow, it could be in 2009, but it you bought right, it should pay off.

Remember this: You make the most money in a bear market, you just don't know it at the time. I am taking this to heart, it has worked in the past and I believe it will work this time. I am finding many high-conviction, high quality ideas where I am initiating and adding to positions.

I don't know about you, but when supermodels start thinking they are currency experts, I can't help but feel the bottom is near. It was the same in 1999 when taxi drivers became technology experts. Bottom line, ignore the noise, don't become paralyzed by Mr. Market's machinations, buy good companies for good prices, and hold tight.

As JFK said, "There are risks and costs to any program of action, but they are far less than the long-range risks and costs of comfortable inaction."

Comments

[billb:]

Good and well timed article. I'm searching for places to add to my long term holdings today. I usually know that if buying is painful (and it is today), then I'm probably doing the right thing. Sometimes it'll be wrong, but staying well diversified will mitigate a lot of your wrongness.

2007 Nov 08 01:46 PM

[RDionysus:]

Awesome observation, Todd! The other day when I was listening to AM radio in the car, and I heard the blurb about Gisele Bundchen wanting to get paid in Euros because of the weakening dollar, I said, "Cmon, now that's a contrary signal if I ever saw one"
The same way almost a decade ago when all the mainstream news magazines had the chart of the Dow on their covers and they were euphorically celebrating all the record breaking. When I saw that I knew the top was nearing.
I'm still waiting for the panic-ridden "final pukeout" to signal the end to this recent debacle, though....

2007 Nov 08 02:38 PM

[RDionysus:]

Awesome observation, Todd! The other day when I was listening to AM radio in the car, and I heard the blurb about Gisele Bundchen wanting to get paid in Euros because of the weakening dollar, I said, "Cmon, now that's a contrary signal if I ever saw one"
The same way almost a decade ago when all the mainstream news magazines had the chart of the Dow on their covers and they were euphorically celebrating all the record breaking. When I saw that I knew the top was nearing.
I'm still waiting for the panic-ridden "final pukeout" to signal the end to this recent debacle, though....

2007 Nov 08 02:38 PM

[bad doggie:]

what an ass.

2007 Nov 09 12:29 AM

[Liverdiefree:]

Seems that comment reflects far more on the person making it than on the article in question.

2007 Nov 09 04:04 PM

[Liverdiefree:]

Seems that comment reflects far more on the person making it than on the article in question.

2007 Nov 09 04:04 PM

[User 105482:]

very
good

2007 Nov 09 02:21 PM

[Sean Olender:]

Yes, I agree that once taxi drivers are betting on markets, or currencies, that it's bound to be late in the game. But I don't know if I can agree about super models who almost certainly have more income and assets than you do. People worth many millions are not usually the last to find out that something is a bad bet.

I'm not looking forward to this, but everything the Fed and Congress appears ready to do suggests absorbing the cost of the massive bad debt into the federal debt. That's something a banana republic does just before its leaders and the top 2% of income earners relocate to other countries.

Ben Bernanke's shift from wanting Fannie and Freddie trimmed down in size because of the "systemic risk" they present shifted on Friday to Mr. Bernanke suggesting Congress should raise Fannie's loan cap to $1 million and provide an explicit guarantee rather than the previous implicit one. This sort of shift doesn't happen unless people are expecting catastrophically bad things to happen. Fannie just turned in a big loss for the last quarter and has already huge exposure to the US real estate market - a market that is facing a very severe and imminent downturn.

With this sort of bailout, it is hard to imagine that the resulting chaos won't cause the dollar to slip much, much further. And the fact that it's being proposed at all suggests that major players have more to gain with a bailout and dollar collapse than taking their medicine. These people wouldn't choose to permanently damage the mortgage market in the United States unless they believed that it wasn't going to be a business at all for 10 or 20 years.

We're on borrowed time for sure. When investment banks, banks, investors and others are willing to terminate a huge industry just to get out of their liabilities, you can bet they expect that things are going to be very, very bad.

Within six months there will be a massive bailout and within 18 months there will be a massive default on the debt that was transferred from investors to the US government. I think investors should consider investing exclusively outside of the United States until this blows over... if it does indeed blow over.

2007 Nov 10 09:33 PM

[Sean Olender:]

Yes, I agree that once taxi drivers are betting on markets, or currencies, that it's bound to be late in the game. But I don't know if I can agree about super models who almost certainly have more income and assets than you do. People worth many millions are not usually the last to find out that something is a bad bet.

I'm not looking forward to this, but everything the Fed and Congress appears ready to do suggests absorbing the cost of the massive bad debt into the federal debt. That's something a banana republic does just before its leaders and the top 2% of income earners relocate to other countries.

Ben Bernanke's shift from wanting Fannie and Freddie trimmed down in size because of the "systemic risk" they present shifted on Friday to Mr. Bernanke suggesting Congress should raise Fannie's loan cap to $1 million and provide an explicit guarantee rather than the previous implicit one. This sort of shift doesn't happen unless people are expecting catastrophically bad things to happen. Fannie just turned in a big loss for the last quarter and has already huge exposure to the US real estate market - a market that is facing a very severe and imminent downturn.

With this sort of bailout, it is hard to imagine that the resulting chaos won't cause the dollar to slip much, much further. And the fact that it's being proposed at all suggests that major players have more to gain with a bailout and dollar collapse than taking their medicine. These people wouldn't choose to permanently damage the mortgage market in the United States unless they believed that it wasn't going to be a business at all for 10 or 20 years.

We're on borrowed time for sure. When investment banks, banks, investors and others are willing to terminate a huge industry just to get out of their liabilities, you can bet they expect that things are going to be very, very bad.

Within six months there will be a massive bailout and within 18 months there will be a massive default on the debt that was transferred from investors to the US government. I think investors should consider investing exclusively outside of the United States until this blows over... if it does indeed blow over.

2007 Nov 10 09:33 PM

[Sean Olender:]

Yes, I agree that once taxi drivers are betting on markets, or currencies, that it's bound to be late in the game. But I don't know if I can agree about super models who almost certainly have more income and assets than you do. People worth many millions are not usually the last to find out that something is a bad bet.

I'm not looking forward to this, but everything the Fed and Congress appears ready to do suggests absorbing the cost of the massive bad debt into the federal debt. That's something a banana republic does just before its leaders and the top 2% of income earners relocate to other countries.

Ben Bernanke's shift from wanting Fannie and Freddie trimmed down in size because of the "systemic risk" they present shifted on Friday to Mr. Bernanke suggesting Congress should raise Fannie's loan cap to $1 million and provide an explicit guarantee rather than the previous implicit one. This sort of shift doesn't happen unless people are expecting catastrophically bad things to happen. Fannie just turned in a big loss for the last quarter and has already huge exposure to the US real estate market - a market that is facing a very severe and imminent downturn.

With this sort of bailout, it is hard to imagine that the resulting chaos won't cause the dollar to slip much, much further. And the fact that it's being proposed at all suggests that major players have more to gain with a bailout and dollar collapse than taking their medicine. These people wouldn't choose to permanently damage the mortgage market in the United States unless they believed that it wasn't going to be a business at all for 10 or 20 years.

We're on borrowed time for sure. When investment banks, banks, investors and others are willing to terminate a huge industry just to get out of their liabilities, you can bet they expect that things are going to be very, very bad.

Within six months there will be a massive bailout and within 18 months there will be a massive default on the debt that was transferred from investors to the US government. I think investors should consider investing exclusively outside of the United States until this blows over... if it does indeed blow over.

2007 Nov 10 09:34 PM