Turbulent Times Require a Disciplined Approach to Investing

The market continues to struggle to find a firmer footing. As the chart below notes, September is living up to its place as the worst performing month for the market.

click to enlarge

Source: Chart of the Day

At the moment, the situation is very fluid. The Federal Reserve seems to be sending a strong message that it will not bail out every mistake or financial institution (Lehman (LEH)). To have two of the oldest and most respected names on Wall Street (Lehman and Merrill (MER)) meet their demise in one day earlier this week, and the government's infusion of funds ($85 billion) on Wednesday, into the largest insurance company in the world AIG (AIG) certainly makes one take pause.

While one can argue with some of the logic and tactics from the government, there are some smart people working through these financial issues. The Federal Reserve has injected the most liquidity into the financial system since 9/11/2001. The Fed's primary role is financial system stability. They will work to provide sufficient liquidity to work through this distress. Excessive leverage and financial engineering with real estate assets has created much of the problem. In addition, the advent of "mark to market" accounting has created short-term pressure for financial companies that has exacerbated the situation. Although regulation can sometimes cause unintended consequences, it is clear that smart regulation is necessary to keep up with fast moving financial engineering. Most of the problems we are now facing are almost entirely credit related.

Many have said these are unprecedented times. On the one hand, I would agree that the issues impacting financial firms seem unprecedented. On the other though, it wasn't too long ago that we experienced the technology bubble. During the deflating of the tech bubble, the Dow retraced nearly 40% of its value from 2000 to 2002. From a year ago, the Dow Jones Industrial Average is down 20%. I am unable to predict the future, but I do believe famed investor Warren Buffet might have said it best:

I will tell you how to become rich. … Be fearful when others are greedy. Be greedy when others are fearful.

-- Warren Buffett

Historically, many of these types of declines have proved to be great long-term buying opportunities. Maintaining an overall philosophy of owning high quality companies and fixed income investments serves one well during difficult times. It is always important to maintain a disciplined investment approach during these times.

 

Comments

[PeteK:]

I like the last paragraph and agree that "BUYING OPPORTUNITIES" are all over the place. Remember the old saying "Constructions come only after Destruction." Now is a good time for small investors to get a few shares of those big companies while a few weeks ago was almost untouchable for small investors.

2008 Sep 18 07:47 AM

[Alex Filonov:]

Sure, there are buying opportunities. The question is: where? I wouldn't touch financials with 10 foot pole right now. Goldman Sachs under 100! It's under book value! The problem is, I don't know how rotten this book is. Yes, it's time to buy something. But remember: many stocks are going down even more, and you don't know which ones. If you diversify today, you win tomorrow, just be prepared to see half of you position go down and stay there. This was my experience of 2000-2002.

2008 Sep 18 01:35 PM

[neeb??:]

As per usual I find that all I've been doing is picking up some of those financials through shear research...
Also consider our dear friend overreaction which produces its corrollary;
Oversell...

2008 Sep 19 08:50 PM