Blog Post

Let’s be honest with each other and just lay it out there: The markets suck. And if you’ve been in them for the past month, more likely than not, you’ve lost money because no sector has been truly immune to the drops in the indexes. We could give you a blow-by-blow of what’s happened with an in-depth analysis, but lately, you can’t open the newspaper or turn on the television without some pundit pummeling you with their opinion. So, suffice it to say, the markets took another dive today, with the Dow Jones Industrial Average down 2.1 percent, the S&P 500 down 2.7 percent and the Nasdaq Composite off by 2.5 percent. The yield on the 10-year Treasury note finished the week at 4.69 percent as more investors lost their stomach for risk. It actually looked like we were going to catch a break in the third quarter, with the markets trying to set themselves up for a good run. Then, in the second week of July, we took a dip. Scary? Yes. But then we had a nice rally on some strong earnings news, and the ongoing merger and acquisition (M&A) activity gave the markets a boost to new highs. Then it happened. The subprime issues, which had been simmering for months, finally decided it was time to explode. Hedge funds melted, mortgage lenders evaporated, and the markets took a dive. I don’t believe that subprime mortgages and irresponsible lending practices are entirely to blame, though they certainly didn’t help the situation any. Overall, credit was too easy to get, period, and we all have big dreams that are a lot easier to achieve when you can charge it now and pay later. And when it comes time to pay up, the money you’re actually making just may not be enough to cover all the bills. But the biggest thing that we’re seeing right now is market psychology at its finest. We’ve been on one of the longest bull runs in history, with many investors treating the markets like an ATM machine. If you put $10,000 in today, you’ll be able to pull $20,000 out in a month or a year, whatever your particular time frame may have been. And that’s not the entirely wrong attitude. It’s been empirically proven in study after study that if you invest in a responsible way, you can rest reasonably assured of a pretty decent return. But basic laws of gravity say what goes up must come down, and that applies to stocks as well. Things get overvalued, with new money chasing the highest returns. You almost have to look at the stock market as an animal, satiating its voracious appetite on all the money we’re willing to throw at. But like any other animal, if it eats too much of our cash, it’s got to slow down for a while and let things digest. Or if it’s like some dogs and really gorges itself, it throws up. And if it keeps overeating, it will consume all of the available food and then start to slowly waste away when there’s nothing else left. During the past few years, people have been pumping money into the markets hand over fist, chasing the dream of easy money. But a lot of folks haven’t been entirely responsible about choosing their investments with care and all due diligence. And when you don’t exercise some degree of caution and common sense, the markets chew you up and spit you out at the first sign of trouble. This is why you can’t just run you finger through the stock listings and pick out the biggest yields or fastest growth and think you can just sit back and cash in. Thousands of people have tried that over the years, and only the luckiest ever got rich doing it. If you look at a chart of the S&P 500 over its lifetime, it’s a constant cycle of ups and downs. Because we’re already being honest, lets be realistic, too; the downturn isn’t going to last forever, and probably sooner rather than later, we’re going to pick right back up where we left off. It’s just the way of things. But it will shake out the weak positions and pure speculators who weren’t keeping anything in reserve. In troubled times folks may flee to bonds or real estate or maybe even coins and bullion. But every investor has a little gambler tucked somewhere away inside or he or she wouldn’t be investing to begin with. And investors always have to get their fix. When a little ray of sunshine peeks through the clouds, the people will move back into the markets and the inexorable upward march will begin anew. The best thing we can do now is to not give ourselves an ulcer watching the tape or to stuff all our cash in the mattress. We have to learn from our mistakes and go back and re-examine our portfolios. You should do exactly what we do here: really understand every company you’re invested in. Know what its exposure is, what the company does, and what the prospects are for its business. If you get what they do and it makes perfect sense to you, don’t sweat the downturns. Just as history teaches us there will always be corrections, it also shows us that, in the long term, we always come out smelling like roses. Personally, until I see four horsemen on the horizon, I’m staying in the markets. This may seem like trite sentimentality when you’re sitting on a big loss in your portfolio, but don’t panic and happy days will be here again sooner than you may think.