We have a feeling that circumstances have changed in a major way for most investors. The tide has turned, we keep saying. But with so many currents swirling around, it’s hard to know for sure.
While the masters of the universe don’t look quite so masterful, the wage slaves are getting swept out to sea. They’re trying to keep their heads above water, but their chains of debt are getting heavier and heavier. Auto sales may fall to a 15-year low by the end of 2007. In San Francisco, builders are offering discounts of as much as US$150,000.
Meanwhile, on the East Coast, Senator Chuck Schumer says NYC is falling into the “black hole of a housing recession.” Manhattan itself still has plenty of money. But the kings of Queens are suffering foreclosures at a rate 69% higher than last year. The “economy is on the edge,” says Business Week.
“The market is trying to sort out a lot of things right now,” Capital & Crisis’ Chris Mayer tells us. “The subprime worries certainly have hit the financials. There is any number of spillover effects. Many firms tied to housing have seen their stocks crushed. There is a looming slowdown in the US economy. Profit margins are under pressure. And we have all this occurring during a time when the market averages are on the high side, as far as valuations go.
“So the market is rocky as heck, and many stocks in the resulting confusion will get tossed out with the rest. Losses beget losses, to an extent. People pull money out of their mutual funds, and then the mutual funds have to sell things, whether they want to or not.”
However, all is not lost, according to Mr. Mayer.
“Ironically, though, this is exactly when you should be willing to stomach the volatility and pick up those overlooked bargains.
“Reading the shareholder letters of successful investors is one of the things I like to do regularly. In the last round, after the mini-meltdown in August, there was a common lament. People pulled their money out of these funds just as the money managers finally found something to buy!
“Fearful investors irrationally sell when prices are down. For the typical investor, it hurts his or her returns. It’s why investors usually don’t even enjoy the posted returns on their mutual funds. Because they take out the money when the stock market goes down and they put it back in when it goes up. They try to time things, and they inevitably miss tops and bottoms and again and again. Research shows time and time again that the typical investor trades too much.
“I’m not sure what your individual situation is, but I feel safe in giving you the broad advice of not selling a stock just because it is down in price. Likewise, don’t buy it just because it’s gone up. And remember that times like this get very confusing. The market prices you see are not the rationally well-considered prices of informed and calm participants.
“The dealmakers, those fellows who buy and sell whole companies or big stakes in companies, are not selling today. They are buying. Importantly, they are buying not the market, but specific stocks.”
Markets and Money