Warren Buffett says, " Where others panic, you have to be greedy and where others are greedy, you have to be fearful". But he has hundreds of billions to invest, and we don't. So don't be greedy yet.
Right now, cash is king, and don't even give that a second thought. After seeing what happened over the last month, where the lifespan of a market rally fell to a session from a span of 3 days, it is best to sit on your cash and wait for the opportunities to come flood you.
In this environment, where many investors are thinking that cash is king, risk aversion begins to take over, but there is also significant deleveraging going on across the globe. So big players are raising cash and that is weighing down asset prices across the spectrum.
At some point, the markets will bottom and fear will have overbalanced on the scales. The markets will rally and all that cash sitting on the sidelines will come back into investments that can earn a higher rate of return. Just like after October 1987, just like in 1990, just like after 9/11, and just like after Oct. 2002. I still have some hedges on, and plenty of cash to weather this, but I will be ready to take advantage of these declines when I see signs of stabilization.
Now, a little commentary on the market mania. The Dow was first down 200, then shot up like a rocket, up 409 points, on the new proposals made by Paulson. He proposes that short-selling of financials should be banned, and that the US will take over bad bank debt. I think both the proposals are absolutely ridiculous. If anything, they are completely against the notion of an efficient market, where supply and demand are supposed to work in sync and decide a rational price for equities, commodities and assets.
By meddling with this scenario, the Treasury is upsetting the applecart and trying to quick-fix the terrible situation in the banking system. Make no mistake, even I have lost a large chunk of my portfolio due to the crash, and I welcome any help from the Treasury, but why now, after all the bloodshed is over? Why not in March when the first signs of this were obvious, and banks were issuing warnings every day?
The Treasury could have assumed the banks' bad debt way back in early 2008, and saved millions of people the loss of their hard-earned money which was not only in stocks, but in (supposedly) safe ventures like 401K plans. Also, by proposing a ban on short-selling bank stocks, the Treasury Secretary is essentially saying the free market theory is nonsense, and that he is going to dictate the market behavior by his unnecessary interference.
I agree that naked short-selling is illegal and should be banned, but if making money out of a company's stock when it does well is okay, so should be placing bets on a company which is clearly doomed and does not have a future. I do not see any reason why these bank stocks should get special treatment, even though they screwed up and brought this mishap upon themselves.
To conclude, I believe this is a welcome sign for many investors, who will not lose their shirt in the stock market, but make no mistake, it is a temporary fix, and will not eradicate the root cause of the crash. Now the banks have the guarantee that if they do fail again, Uncle Sam will always bail them out. And that's not good for anyone.