Random Thoughts on what I am doing in a down market

Posted by admin on January 22, 2008 in Misc.

Not knowing what was going to happen on Monday, on Sunday night I wrote a post about buying gold as a hedge against inflation and then Monday hit. Today, I settled on my sale of some money market funds to buy gold- am I buying it? Not on your life. Gold went up 5% this morning in a mad panic. These were my precise instructions to my broker: “Everyone is being stupid. Let’s wait out the stupidity. I’ll speak with you next week.”

Let’s just put some of this week’s events thus far in perspective. Recessions are natural parts of economic cycles; they cleanse the system of publicly traded companies that shouldn’t be around and remove excesses from the system. Since July 1953, there have been 9 recessions (not including this one), the longest recession in this time period lasted from July 1990 to March 1991 (the shortest was March 2001- November 2001- oh how we forget!) [added note: based on S & P 500]. The lesson to be learned are that RECESSIONS ARE SHORT. Think of them like a band-aid being ripped off fast- it sure hurts but the pain doesn’t last.

Second, we have entered the age of tabloid journalism. Every little story gets blown up like the Iron Curtain was falling or someone walked on the moon every day. Ignore chicken little and plot your own course. A lot of the hue and cry is from Wall Street who fear that their 7 figure salary days are disappearing; given the proximity of the traders to the media centers in Manhattan, the hue and cry has been magnified. Strangely, I feel little sympathy for the potential loss of the unsustainable life-styles of the Gordon Gecko’s of the world. STAY THE COURSE.

Third, do not take generalities and apply to all situations. Certain industries will continue to perform well during recessions (everyone drinks, smokes, gambles, take drugs, eats, buy basics etc). Certain neighborhoods will always be desirable to buy in short of a depression. People still need to consume- just not new iPod’s every 6 months consume, but consume. Context is everything. There will always be niches which are profitable. Remember in panics, oxygen mask makers do well. CONTEXT IS EVERYTHING.

Fourth, this is the time to really pay attention to your portfolio. Most people tend to close their eyes during bad times under the “ignorance is bliss” theory. I am doing the exact opposite. I am really looking for deals now. PAY ATTENTION.

Here’s why- RBC released the following study today- in the 12 months following every recession since 1953, the market returned an average of 14% (I am excluding the tech bubble numbers) [added note: returns from the S & P 500]. If you close your eyes, how will you find bargains? To give you a better sense of the issue- in the same study, RBC found that the average market return during a recession was 1.5% (it is in the 12 months before a recession that your portfolio really takes a hit since average losses are greater during that period than in the recession). And you cannot capitalize on opportunity if you play chicken little. CHANGE = OPPORTUNITY

Finally, I end with a quote:

“The way to make money is to buy when blood is running in the streets.” – John D. Rockefeller

3 Comments on Random Thoughts on what I am doing in a down market

By Mom2KG on January 22, 2008 at 10:27 am

When you’re giving your recession stats, where are you getting the info? I ask because I grew up in Newfoundland, where the recession was felt as mass unemployment, bankruptcies, poverty, and outmigration. The stock market was the least of the worries. But it lasted – or so it seemed – from the late 1980′s until around 2000.

By admin on January 22, 2008 at 10:45 am

Good question- the stats are from the S & P 500. As for Newfoundland, it reinforces my point that context is everything. Even in good times, certain regions will suffer while in bad times, certain regions will be fine.

By moneygardener on January 23, 2008 at 6:40 pm

Good post.

I would say the way to handle these times is to pay attention to the ‘deals’ out there, but try to ignore your actual portfolio holdings. If you are young you should be loving every minute of this…