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‘Be greedy’, especially when others are fearful

Posted: October 22, 2008 10:08 p.m.
Updated: December 24, 2008 5:00 a.m.

So says Warren Buffet, the billion dollar investor, who is now buying US stocks. He said "A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful".

As I reflect on the words emanating from the "oracle of Omaha" I notice that, once again, the DOW is down over 400 points (as I write this column) and approaching the 8500 level again in an apparent retest of its previous lows. Even just contemplating a move back into the market sends waves of fear radiating through me. How do I calm this panicky hysteria and do what is logically and financially wise?

We have to recognize that the current economic news is about as bad as we have seen since the great depression. The financial world is a mess with not only businesses and companies on the brink of bankruptcy, but also states and nations are finding themselves also teetering on financial collapse.

Unemployment is rising, home prices are still declining, and the credit market is extremely tight. Who, in their right mind, would invest now given the above?

Looking at where the market is at this moment, I see the DOW average again down some 35% from the beginning of the year and down over 40% from it's peak in October of 2007. Do we see fear, even panic at this time? Are babies being thrown out with the bath water? I wonder.

First, lets consider the alternatives.

We can stuff our money in a mattress. At least it won't go down in value. Or will it? We still have inflation. Our dollars are buying less each year. This is called "loss of purchasing power". We do become poorer, only more slowly.

How about putting our money in the bank now that the federal government has guaranteed deposits up to $250,000? Checking the latest bank savings interest rates courtesy of the Wall Street Journal, we find the average yield of the major banks on a 6 month CD is currently 2.16%. The last time I checked, our inflation rate is higher than that. Again, we witness a loss of purchasing power.

Conclusion: As scary as the financial markets are right now, this is actually a very good time to put your toe into the water. Remember, with stocks, bonds, real estate or just about any other kind of investment, you want to buy low and sell high.

There is sound logic to this advice. In that same article by Jim Jubak, he says:

"Here are three reasons why (there is sound logic to investing right now):

n If you had bought stocks on Oct. 20, 1987, the day after the Standard and Poor's 500 Index crashed by 20.5 percent, you would have been up 11 percent in one year and up 52 percent in two years.

n If you had bought stocks on Oct. 9, 2002, the day that marked the bottom after the dot-com bubble broke in March 2000, you would have made 33 percent in a year and 44 percent in two years.

n If you'd bought stocks on Aug. 10, 1982, just as the economy started to recover from the strong medicine that the Federal Reserve had administered to cure the inflation of the 1970s, you would have been up 57 percent in a year and 61 percent in two years."

Are we at the bottom? No one knows for sure.

I do know this however: we are a lot closer to a bottom now than we were a year ago. And, believe it or not, we do have some financial wind at our backs. Doug Kass wrote in on Oct. 22, "... the basis of an improving intermediate-term market picture seems likely to reassume center stage based on the following considerations:

n Inflation is ebbing.
n The Fed is and will remain market-friendly.
n The credit markets are thawing.
n Fiscal stimulus appears on the way.
n Financial institutions' capital bases are being shored up.
n Stock valuations are subdued.
n Investor sentiment is at record negative levels.
n Forced selling by executives, individuals, hedge funds, and fund of funds has historically marked a market bottom."

All of the above should eventually help to stabilize the market, the economy and our financial lives. Until then? Try to resist looking at where the stock market indexes or where your own portfolio balances are currently (ahh.... I see the DOW is right now down another 380 points!... Where's my brokers number? I know I had it somewhere!)

D. Frank Norton is a money manager and financial planner in Santa Clarita. His column represents his own views, and not necessarily those of The Signal. "It's Your Money" appears Thursdays and rotates between a handful of the Santa Clarita Valley's financial professionals.


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