Quote of the Day

Joseph Stiglitz on the collapse of structured finance:

"Securitization was based on the premise that a fool was born every minute. Globalization meant that there was a global landscape on which they could search for those fools - and they found them everywhere."

Collateral Damage

The impending recession, perhaps depression, has Americans scared, and rightly so. However, I'm afraid that as their focus shifts more acutely toward survival, other worthy causes like environmentalism will be relegated to a back seat. How will greenness garner public interest when unemployment is rising and 401ks are disappearing?

"To cherish what remains of the Earth and to foster its renewal is our only legitimate hope of survival." -- Wendell Berry

Why Play the Fool's Game of Buy and Hold?

The conventional "wisdom" has been, for years, to buy stocks and hold them for the long term, i.e. until retirement. That advice has caused untold millions of American retirement accounts to evaporate. The latest incarnation of this advice has manifested itself in parroting "don't let this downturn spook you into selling" by many in the mainstream Media.

One recent example of this mantra born of specious reasoning appeared in a posting on MarketWatch yesterday:

"Don't get mad, get even: That sentiment could be a powerful motivator for shellacked shareholders who are reeling from the stock market's collapse.

Spooked investors may be tempted to sell into periodic rallies at this point, in an effort to at least recoup some losses. But that hopeful strategy is full of flaws. Selling into a rally is for traders, not investors. It shreds long-term plans and puts you on a hair-trigger defense."

How can anyone pretend to justify letting a portfolio of, say, $100,000 fall to a value of $60,000 just to maintain a "buy-and-hold" philosophy. They rationalize that to leave this market before seeing the last vestiges of value disappear would violate some hallowed principle of investing. Are you primarily interested in maintaining tradition at all costs, or in maintaining your retirement account?

They say, "You don't want to miss the market turnaround by being in cash when it happens." Utter poppycock!

Let's take that hypothetical $100,000 portfolio and suppose that, instead of hanging on out of sheer, stubborn, defiance of the market, we sold everything when it was down 15%, at $85,000. Now while other lemmings of absurd reasoning watch their holdings disappear, we are safe and can wait until the market rebounds to reinvest. We only have to see our $85,000 appreciate by 17.5% to get back to where we were, while those who held on until they were down to $60,000 have to get a whopping 67% appreciation just to get back to even.

Now, either prospect is disappointing. But the wise investor who rode out the downturn in cash, is years ahead of the one who stubbornly held on to his buy-and-hold philosophy without paying homage to reality.

The wise investor has other advantages over the false-adviser's puppets.

When he gets ready to redeploy his cash, he can put it to work in fresh, newly favored companies and industries. The buy-and-hold bulldog, on the other hand, is still in the same, potentially stale instruments he was in before. It is highly likely that new leadership will have emerged in the markets over the interim, and with cash in hand, our wise investor will be able to leverage that market trend.

The holder of cash, also can pick his moment to pull the trigger. He can wait until a confirmed and strong rally is underway before jumping back in. The unfortunate media disciple has no such choices on his horizon. His fortune will bob like flotsam on the waves, totally at the mercy of a fickle market.

Why play the fool's game? Why not use a little intelligence and logic to save your retirement? Whereas I am not advocating that you develop a trader's mentality and run from every slight downturn or chase every upturn, I do think it is important to not get married to your holdings just to satisfy some nefarious guru's antiquated and impotent theory.

Pick a tolerance level at which you wish to get into cash and then let that be a guide (not a dictate). Perhaps you can only tolerate a 7% loss as advocated by Investor Business Daily's CANSLIM approach. Perhaps you are OK with a 15% decline.

Regardless of your tolerance for risk, start thinking about maintaining value rather than maintaining tradition. Is it better to stick with the failed program or to prosper? The choice is obvious.

No enemy is worse than bad advice. -- Sophocles

Quote of the Day (Mine)

"As long as the pundits keep declaring that the market has hit bottom, it hasn't." -- RCA

Capitulation

Many pundits are saying that we have already seen the capitulation that signals the bottoming of the market. I believe we will not only see capitulation, but a series of capitulations due to the perfect storm of a slowing economy, a lack of public confidence, the credit crunch and liquidity crisis, real estate values plummeting, poor retail sales figures, foreclosures, fear, and government ineptitude. The DOW will be below 8000 (and possibly below 7600) before there is a true bottoming out of the market. Look out below!

Quote of the Day

"A government that is big enough to give you all you want is big enough to take it all away” – Barry Goldwater

Noteworthy Comments on the Bailout

Here are a few exquisitely penned quotes from the financial blogs this morning regarding the government's latest bailout chapter:

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"This is still, at the core, very much like having a burst water pipe in the basement and the government's solution is to keep buying more paper towels to soak up the water. The water keeps coming and the government keeps buying more towels, which is not enough to keep the furniture from being destroyed. After a while, the basement becomes full of soaking wet paper towels and the leak is still going and the foundations are rotting - at which point the government announces they are out of paper towels and you are on your own. Right about then, someone may suggest calling a plumber to stop the leak but, unfortunately, all the money was spent on paper towels so a plumber is no longer a viable option!" - Options Trader: Outlook for Turnaround Tuesday

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"Read the stitches on the fast ball. Goldman Sachs transforms itself into a bank holding company during talks with the treasury. The treasury convinces Congress to give it $700 billion to buy bad assets from banks. The treasury decides not to buy bad assets but preferred stock in banks. Goldman Sachs, Henry Paulson's former employer, just happens to be a bank now. After the stock jumps by 87%, the treasury decides it is time to buy. The tax payers are on the line to bailout Henry Paulson's buddies." – comment by Yes Man at Preview of the Bank Buy-In

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"But that one-size-fits-all approach, especially when it's combined with the present bank management which got us all into this mess to begin with, is a recipe for hail-Mary passes and other forms of counterproductive risk taking.

If you're running an insolvent bank, and you get a slug of equity from Treasury, your shareholders will thank you if you use that equity to take some very large risks. If they pay off and you make lots of money, then their shares are really worth something; if they fail and you lose even more money, well, there was never really any money for them to begin with anyway…

There's no sure way to prevent such risk-taking altogether. But if you go the UK route and insist on board seats and the ouster of failed executives, it helps. That's what Treasury did with AIG, and they should do the same with the banks they're rescuing. If they don't, they're basically getting all of the downside of nationalization with none of the upside." – The Weakness of the Treasury's New Bailout Plan

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"To stimulate lending, the bailout plan will attempt to recapitalize banks. The method of recapitalization is best described as robbing Taxpayer Pete to pay Wall Street Paul. In essence, money is taken from the poor (via taxes, printing, and weakening of the dollar) and given to the wealthy so the wealthy supposedly will have enough money to lend back (at interest) to those who have just been robbed." - The Main Problem with the Office of Financial Stability Is Needing It in the First Place

"The genius of our ruling class is that it has kept a majority of the people from ever questioning the inequity of a system where most people drudge along, paying heavy taxes for which they get nothing in return." -Gore Vidal