July 10, 2008 –
If you’ve suffered stock losses this year, this will be the most important article you will read. Back on April 23, 2008, I wrote an article called “Will the U.S. Markets Crash Now — Or Later?” and I opened the article with the statement: “Every time I’ve written about the imminent disaster that awaits U.S. stock markets, and subsequently global markets, the response has been overwhelmingly negative.” In that article, I further stated, “People seem to forget one central and critical point. Most people seem to believe that they have to lose a great deal of money when crises materialize and forget that it is absolutely possible to prosper during crises as well. Thus, because they feel they must suffer during a crisis, the “shoot the messenger of bad news” syndrome commences. That said, I’m still going to state my utter lack of faith in this mini-rally that the U.S. markets are currently experiencing. Due to the huge levels of unaddressed and unsolved risk that still simmers quite potently beneath the surface, with the current “solutions” being implemented today, I honestly can only see two outcomes. Crash now or crash later.”
I suggest that you follow this Seeking Alpha link and read this article, and then read all the comments that followed my article (remember that I wrote this article two and ½ months ago). Because I often take a stance so contrary to the mainstream financial media, criticism of my articles doesn’t bother me. In fact, I expect a lot of criticism because I know that the overwhelming majority of people, the people that constitute the investment herd, follow the guidance of the commercial investment industry and consequently will always disagree with me. At about the same time I wrote that article this past April, the financial press inundated newspapers and financial websites with the following headlines: “IMF Chief Says Worst of Financial Crisis is Over”, ” [U.S. Secretary of Treasury] Paulson Says Worst of Financial Crisis is Over”, “Citigroup Chief Says Worst of Credit Crunch Crisis is Over”, “Financial Crisis Mostly Over, [JP Morgan CEO] Dimon Says” and “[James Finucane says] Are You Ready for Dow 20,000?”
I know that many people called me an idiot, agreed with the theses that were put forth in this deluge of optimism and started pouring money into the U.S. stock markets preparing for a monumental rise that the pundits had promised them was to come. How am I so sure of this? If you follow the above link to my referenced article, you’ll find 29 comments. Of those 29 comments, 9 people agreed with my views while 20 people, or 69%, of all those that left comments basically called me a fool for believing that U.S. markets were going to decline sharply. Everyone has a right to their opinion, even those that called me foolish for believing that the greater crisis was yet to come. And I accept all criticism because to be fair to those that criticize me, they do not have the benefit of access to my much higher level and more specific subscription material, so again, I accept that they can only partially understand my reasoning though my overall sentiment for U.S. markets was quite clear in that April article. However, the point of this article is not to provide a rebuttal. I am writing this article because there is an important lesson in all of this that will save your financial life if you’ve suffered significant losses in the stock market in 2008 because the worst is still not over. I truly believe that is still not too late and even if you’ve suffered 20%, 30%, or even 40% losses in the past year, it is still possible to recover all of those losses over th next two years and be strongly positive if you change your strategies now.
Here is a sampling of some of the comments about my April 23rd article:
“Has it ever occurred to the author that sometimes the messenger deserves to be shot? If it turns out that the S&P lows are in already, what was his point? Maybe he’s too young (or lazy) to research the major difference between this recession-like drop vs. previous recessions.”
“I see the market fairly if not under valued at this time. Investor’s are making decisions more out of fear than optimism at this point in time.”
“Great academic theory… too bad you are wrong and “real life” does not work that way… however keep calling for the crash. I am sure you will be correct in 4-7 years. Now if you excuse me I need to get back to making money in the real world.. not this theoretical Macro- model that you have dreamed up.”
Here’s what happened in the U.S. markets after I wrote that article:
The reason I’m discussing some of these comments is because investment psychology, one of the most overlooked aspects of investing, is one of the top factors every year that causes the average investor to lose a lot of money in stock markets. What do I mean by psychology? Remember in the article that I scripted on April 23rd, I stated that, “Most people seem to believe that they have to lose a great deal of money when crises materialize and forget that it is absolutely possible to prosper during crises as well.” The problem is that the commercial investment industry has one agenda only — to convince the naïve investor to buy and hold stocks and bonds continuously, no matter how poor the investment environment. When I worked for a Wall Street firm, a fellow colleague laughed and once told me after hearing the Chief Investment Officer of a firm speak, “I’ve never heard one occasion when he didn’t believe that stock markets wouldn’t continue to rise.”
When I asked my colleague how long he had heard this CIO speak, he replied, “for seven years”, including three of the worst years in U.S. stock market history since the great depression. When I asked him what the CIO said during those three terrible years in the early 2000’s, he told me that each year the CIO said the markets had bottomed and were set to rally strongly. And this summarizes the problem with the guidance of most commercial investment firms. Just because they say one thing publicly does not mean that they believe it, but they’ll continue to say it because it’s their job to “sell you”. For example, though Wall Street continually calls for dollar rallies and labels gold as a bad investment, when Bear Stearns books were recently disclosed, it was discovered that among their only profitable investments were massive positions short the dollar and long gold.
Thus, if you have suffered significant losses this year, an understanding of investment psychology is paramount if you wish to turn around your portfolio performance at this point. If you have suffered significant losses this year, most likely it is because your investment career has been one where your comfort zone is somewhere just to the left of doing the same things as the Joneses and the Smiths but just to the right of allowing your financial consultant to function like a dictator. In other words, from a psychological standpoint, your losses this year are probably the result of wanting to “fit in” as crazy as this may sound at first. In life, most people find it incredibly hard to go “against the flow”. Numerous psychology studies have proven that most people find it incredibly difficult to make decisions that are in opposition to the majority of their peers. Most people feel much more comfortable in their investment strategies if their neighbors are doing the same thing, incredibly even if this comfort level creates losses. Most investors would rather have the psychological comfort of knowing that everyone else is in the same proverbial rather than stand boldly apart from the sheep-herd, even if such stance is fundamentally intelligent and has much greater probabilities of rewarding them with significant outperformance of all their peers.
As a perfect example, when I discovered that a close friend of mine was still holding onto a largely U.S. stock portfolio last April, I informed him that he should sell out of all U.S. stocks. When I talked to him a few days later, he said that his advisor told him that he should sit tight and wait, because it was likely that the stocks were heading higher and it was a bad time to sell after taking so many losses in the previous 10 months. My reply was that by holding on, his losses would only multiply. In the end, after much convincing on my end, my friend eventually took my guidance over his financial advisor’s and sold out right before the U.S. markets shed over 1,850 points. But this serves as prime example of how commercial investment firms use investment psychology as an important weapon to keep you paying needless fees at the same time they keep you invested in poor strategies. They convince you that no one else at the firm is selling and that you don’t want to feel foolish when you sell out and everyone else gains money in the next several months. This is nothing but pure psychological bullying. Often during bear markets, I’ve asked people what rationale they are given by their advisors to hold on. The most frequent response is that “the markets have bottomed” with absolutely no analysis of or support for why the markets may have bottomed. If you can understand that psychology is often used as a bully pulpit to keep investors invested in terrible strategies, then you have hope for turning around your portfolio performance instead of being led down the path of financial devastation like a dead man walking.
So how does this apply to upcoming earnings season? Financial companies earnings season begins next week, with major US. Financial companies reporting, including Northern Financial (NSFC, 15th), U.S. Bancorp (USB, July16th), Wells Fargo (WFC, July17th), Merrill Lynch (MER, July 17th), Bank of New York (BK, July 18th), Citigroup (C, July 18th), Bank of America (BAC, July 21st), and Washington Mutual (WM, July 22nd). The reason I’m bringing up the topic of the financial companies earnings season is in line with the theme of this article. While I expect nothing but negative news from these banks as I still do not believe that most have been transparent and aboveboard regarding the risk of further write downs from derivatives and off balance sheet assets that they hold, this doesn’t mean that negative news can’t and won’t be spun as positive news. In fact, I 100% expect some stories to hit the financial media over the upcoming weeks about “surprise earnings” statements that are not as beat analysts’ expectations. Why? Because these same games have been played for the past 12 months. Investor relations employees at some financial firms are bound to prime the media and undercut analysts expectations prior to their earnings announcements. Then, when they release earnings that beat these lowered expectations, they can look forward to their “surprise” earnings announcements to provide a boost to share prices! Be extremely careful to dig much deeper than the surface earnings announcements when deciding whether to buy or continue shorting these financial companies.
So again, buyer beware of further stories in the coming months that are bound to reiterate the message that the worst is over. You can almost bank on oil prices declining in late September/October, and further bear market rallies that will be once again labeled as the “turning point” of markets. If your portfolio is suffering, consider shifting your portfolio into hard commodities and agriculture, being patient to purchase such asset classes at proper price points with the guidance of a professional with years of experience in these investment asset classes. Another sure way to get burned even if you shift your portfolio into the proper asset classes is to accept guidance from a professional that is merely jumping on the commodities bandwagon that has no prior experience with these difficult to understand markets. And commodities are not all the same, though we often speak of them on a generic basis as we shouldn’t.
There’s oil, agriculture, hog futures, water, alternative energy such as wind, solar and uranium, gold, silver, palladium and many other diverse assets. And proper timing in these markets is key to reaping profits. If you stay with someone that is merely jumping on the bandwagon, their timing most likely will be awful and you may end up with further losses when you should be earning stellar profits. However, breaking ranks and taking a bold new psychological stance will be critical to not only salvaging your financial life, but critical to prospering over the next several years. It is precisely because I dig so deep that I have been able to predict the subprime crisis, the gold/silver bull run, the hedge fund collapses, and the rapid descent of the dollar months before they happened (as my subscription members well know). These predictions have manifested themselves in the 21.68% 12-1/2 month return of my subscription newsletter, the Global Stock Picker, a return that has respectively outperformed U.S. and U.K market indexes by about more than 37% and 39% and Chinese market indexes by more than 63% during the same investment period. However, the best returns by far will come in the coming years, and I wouldn’t be surprised to double those annual returns in one of the next two years. I am still convinced that the worst of this crisis is far from over. For more information on how to prosper from this developing global crisis, please visit us at https://www.maalamalama.com.
[tags] bear markets, build wealth, safest investments during bear markets, best investments during bear markets[/tags]
