There is a special challenge for investors planning for 2009.
It is easy to get caught up in emotion, especially when so much is
going wrong. This causes people to look backward. Investors can meet
the challenge by using a sound analytical framework and by looking
ahead. For those nearing retirement, this is particularly crucial.
My advice to our investors emphasizes two major points:
1.
The news flow is incessantly negative — fraud, corruption,
mismanagement, greed, and every proposed solution called a bailout.
When this message is repeated in every news source, it is also
reflected in current market prices.
2. The market has a gift for us. Our initial rebound target is Dow 11,000. Let us see why.
Basic Rationale
We
will not have another Great Depression, and the prices of many stocks
are at depression levels. The collapse came in mid-September when the
Lehman Brothers failure led to a credit market freeze. Take a look at
the chart.
The
Lehman failure, permitted by government inaction, made every lender
suspicious of every borrower. Normal lending came to a halt, throttling
regular business activity. Equity and credit markets had been priced
for a moderate recession. Now many expected something much worse, a
depression.
Meanwhile, the effect of the government
policy has been underestimated. None of us expects the Federal
Government to solve all of our problems. We have joined the criticism
of the many mistakes.
Enough is enough.
The
counter-reaction has been too extreme. People have expected immediate
policy impacts. This is naïve. There are lags in implementation and in
effect. The modern news cycle has become extremely short. Any new
policy has scores of critics – all wanting to get on TV – within hours
of the announcement. The reaction gets a pitch in blogs and in the
press. The hot-button traders join in.
When the
market reacts negatively, as it has for months, it seems to validate
the pundit reaction. People are not looking at the actual policy
effects, but rather at stock prices. Everything becomes a story of
fraud, corruption, and bailouts. This is a trap.
Stories of corruption are easy to understand. Economic impacts are complicated. Successful investing means finding things that others do not see. The wise investor will see that current government policy is exactly the opposite of depression-era actions.
Data will triumph over speculation.
There are already many signs of improvement. Each is important and the cumulative effect is very important.
· No more dominoes falling. A
few months ago we faced the risk of failure in many banks and major
financial institutions.
