Barron's: 'How to Keep Your Nest Egg From Cracking'

While I find much of our financial and economic news inspiring, It is not very often that I find something that really resonates with me from a moral perspective.

While it is bothersome on many levels that [Bear Stearns (BSC), Fannie (FNM) & Freddie (FRE), Indy Mac, and probably / most recently Lehman Brothers (LEH)  / Washington Mutual (WM) / AIG (AIG) ] have failed in our free market system, the thought of people giving money to “experts” to invest in these companies and the broader market is far more unpalatable.

Barron’s published an article in this weekend’s edition which deals with this very issue. I think this installment is worth reading if only to illustrate that it’s not safe to be invested in most equities in this environment. Typical recessions of the past have lasted 2-3 years, but they did not witness the evaporation of billions of dollars in write downs, and perhaps up to 1 trillion in taxpayer support for our Government Sponsored Enterprises.

The main point, which is continually disregarded by the media, is that many of our market’s participants are not hedge funds and proprietary trading desks. There are REAL people who think now is a good time to buy certain stocks like Warren Buffet would…We cannot rely on the media pointing this out, because that is not their job. We cannot rely on a source when they have an ulterior motive; in their case, it’s getting viewers.

1. We are in year 1 of a recession; one in which there is unanimous agreement that it is unlike anything anyone has ever seen. What good will come out of entering right now? You will not miss anything until bank stocks are in single digits…
2. Unfortunately, this one is not restricted to the equity markets (like the tech bubble of 2000-2003) in which investors felt the most pain. Our American consumer, one which has been indestructible in the past, is now faced with asset deflation (houses, cars, and would not rule out dollars as a deflationary asset just yet) and commodity inflation (while gasoline has come back from $4 a gallon, it is no longer $2, and food still costs more than last year). Because these notions are so negative (believe me, I feel pain when I see peoples’ reactions to this cynicism) we have been trained to brush it off and say “we’ve gotten through this before. It’s part of the business cycle” This is certainly true. Maybe I just haven’t thought enough about this, but I can’t remember a time where 70% of our GDP (consumer spending) was weakening, while we underwent credit, mortgage, and energy crises simultaneously.
3. Honestly, what is there to lose by keeping mostly in cash, and if one must invest, can it be in companies which have A LOT of cash, and pay big dividends? An individual is not flaunting his/her financial performance like a mutual fund or a hedge fund, one which would be ecstatic to say “I only lost 8% in this market when the S&P lost 20%…That makes me better than the average!” Money managers try to manipulate statistics and mask the reality of relativity: is losing 8% really good? A checking account would have made you 2.5%…that sounds better than the mutual fund’s rate of annualized return…

Finally and most importantly, If you wonder how some of CNBC’s programs can be so optimistic in an “intermediate horizon”, maybe its because their parent company is General Electric (GE). They would rather have your money in stocks than savings accounts, because the run-of-the mill investor is unlikely to short the market. But can we trust our source of information? Is this advice founded on objective analysis of the market, or are they more concerned about their GE stock options? (CNBC is actually very neutral when it comes to talking about their parent company, though).

Finally, one has to approach investing as a risk manager; what can I win? What am I likely to lose? If the trend is down for 2 years, and sideways for another 3 years, is it smart to invest in broad based indexes with no dividends?

All of this is not to say that all investment opportunities have vanished forever, it is just that we will not miss the bus for a while, and it is very foolish to lie below a falling knife.

Disclosure: none