Is It a Time for Panic or Profit?

Monday was a difficult day for the markets with news of Lehman Brothers (LEH) filing for bankruptcy, Merrill Lynch (MER) being bought and insurance giant AIG (AIG) looking for funding. Central banks injected cash into the system to help with liquidity. It’s a lot to digest, whether you are in the business or are an investor.

In fact the Dow ended yesterday nearly 500 points lower - its worst point drop in more than seven years. Many investors may have been unaware of what was going on Monday but have no doubt been made aware of it Tuesday morning.

This is a time when investors have to remember - or be reminded of - the importance of a long-term view. In the short term emotion will drive the stock market. Over the long term it’s fundamentals that drive it. There is no question that emotion is currently in control.

However as has been pointed out in the past it is time like these, as emotionally difficult as they are, when investors can buy great companies at a discount, the very discount that helps power their long term returns. 

What Can Investors Do?

Emphasize Asset Allocation.

Faced with the prospect of continued market volatility, investors should review their risk tolerance to ensure it fits with the asset mix of their portfolios. Market performance over the past several months serves to underline the fact that asset allocation and diversification remain two of the most important aspects of investing.

Continue to focus on the long term.

Benjamin Graham once said “In the short-term, the market is a voting machine. In the long-term, it is a weighing machine.”

Day-to-day market moves are driven by emotion as people react to new information. And volatile periods can continue for some time.  But investors with a long-term focus will recognize that this period of adjustment will present an opportunity to acquire great investments at attractive valuations.

Comments

[Larry House:]

Thanks for the post. I wish profit were the only alternative to panic. There is also loss. It just seems that nothing is working right now. My fixed income investments are under water too, but I don't have to sell, and I will hold for at least another year to see if things get any better. It sure takes guts right now to put more money into equities or fixed income, but now is when they appear attractive. Of course they could get even cheaper! It may take a few years to see anything resembling normal in the markets again.

2008 Sep 16 01:44 PM

[MarvinMBA:]

These markets are going to have an effect on the real world...people that depend on financial institutions for financing homes, credit cards as well a savings and investment. Business has the same needs and their options are also gradually deteriorating with less lendable funds for everyday operations. If the average guy loses his job, his investments and his pension because of these financial failures, there will be few happy campers out in the real world. Depression style bread lines and chaos in the streets are what the country would be facing. We need Fiscal and Monitary policy to help the average guy survive at this stage including a Public Works Program for those that cannot find work. Instead of trying to save the world for Democracy lets try to save ourselves with cheap energy, cheap food and plenty of jobs as well as stable investment opportunities. Were in deep s unless the country starts moving before its too late...Marvin the Maven

2008 Sep 16 02:09 PM

[JasonC:]

Baron Rothschild (one of them anyway) was asked how he made his fortune in the 19th century. He said "when the streets of Paris are running with blood, I buy".

Panic is the only time to buy...

2008 Sep 16 02:11 PM

[MarvinMBA:]

If the average guy loses his job, HIS HOME, his investments and his pension because of these financial failures, there will be few happy campers out in the real world. Depression style bread lines and chaos in the streets is what the country would be facing!!!

2008 Sep 16 02:13 PM

[Umm, yeah:]

So JasonC... what do you suggest buying?

2008 Sep 16 02:25 PM

[JasonC:]

Umm - picked up a little GS at the morning lows. I like PGF, a financial preferred ETF, half in at this point - it is low enough, but not calling a bottom - I still expect it will return 15-20% over a 5 year stretch on a return of spreads to normal. I like IBM at a 14 PE, which has gotten no respect whatever as it turned in consistent earnings growth and uses it to buy in stock. I like Dell on the current weakness, but only gradual, still an open issue. I like Best Buy and Nordstroms for retail exposure, great companies at PEs of 12 on recession discounts. As far as financials go, lots are cheap but not calling any bottoms - my shopping list includes nibbles on ING, Barclays, BAC via the MER deal, in addition to the bit of GS mentioned above.

I also use diversified mutual funds inside a 401k, and moved 10% out of short bonds into US stocks today.

No one can call every turn, but you can see levels, and these are not nosebleed prices. Gradually accumulate as fear spreads, and hold long term.

That is what works for me - YMMV...

2008 Sep 16 04:36 PM

[bearfund:]

Amazing... JasonC and I are both long PGF. Picked up a pile in July at 14 and a bit more today. Pays me every month at a rate that compensates me for debasement, and there is some upside.

The difference between us of course is in the rest ... I increased my short position in treasuries today by buying another big chunk of TBT at 57. That's now half my holdings and I don't expect to get bigger but if I see 55 I won't be able to resist. 20 years is a long time; by then things will have gotten much better or the US will be completely bust so this is a sure thing if you have the guts to stare an 8% daily loss in the face and keep growing it.

Also, consider railroads. Like a rock the past year. I'm long CNI and BNI. They pay little but they hold up, and the business is fine.

Gold, diversified bank preferreds (fat dividends converted to more gold, naturally), and short Treasuries. Pick up on the theme yet? I'm in line for my free money. Please print some more.

2008 Sep 17 02:38 AM

[Umm, yeah:]

Thank you, JasonC! Much appreciated.

2008 Sep 17 10:00 AM

[LJC:]

" But investors with a long-term focus will recognize that this period of adjustment will present an opportunity to acquire great investments at attractive valuations." Like what??? What a stupid, pointless, worthless article. Did you get paid for writing this crap?

2008 Sep 17 11:12 AM

[JasonC:]

Bearfund - on TBT, shorting long treasuries isn't a bad trade at all - especially if you go long financials at their distressed levels at the same time. Call it arbing the doom spread. Or call it hedging the interest rate risk from betting on a recovering of investment grade financials. PGF will serve if you "prefer"...

Umm - glad to be helpful - good trading to ya...

2008 Sep 19 04:50 PM