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Market Watch Fraudsters, Corrections and the American Way
Market Watch Fraudsters, Corrections and the American Way 
Market Watch
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By Charles Delvalle Dear Reader, Would you lend $500,000 to someone who might not pay you back? I don’t know anyone who would do that, unless they were rich, knew the person, and didn’t expect that money to come back. |
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| Fraudsters, Corrections and the American Way |
| Friday, 25 January 2008 | ||||||||
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They’ve really done a job on us, haven’t they? The banks are behind this one all the way. Although the total losses and write-downs from subprime lending are hovering around $170 billion, the impact on the stock market has wiped out $7 trillion of wealth. Yes, that’s trillion with a “T.” Pretty much every investor is feeling the pain. Anyone with a 401(k), IRA or mutual fund account has probably noticed a sizable drop in his or her account statements in the new year. And it never feels good. However, letting your feelings take over now is the worst thing you can do. On Tuesday, when the Dow dropped more than 400 points in less than hour, the whole world seemed to take note. As we’ve learned, there was no reason for concern. In fact, there was a single catalyst that undoubtedly had a large impact on that drop, and it didn’t last long. The single event (we always have to differentiate between a trend and an event) turned out to be one of France’s largest banks, Societe General, liquidating billions of dollars in stock. Although a few billion doesn’t seem like much with the total value of the world markets around $40-$50 trillion, a few billion dollars’ worth of buying and selling goes a long way. Just like $170 billion in mortgage write-downs led to the elimination of $7 trillion worth of wealth, a few billion dollars managed by one fraudulent trader in France can have a significant impact on the world markets. That’s why we're able to mark recent events as a “correction” pretty soon. Not fun, but in the long run, nothing to get worried about. My colleague Christian DeHaemer recently told subscribers of Material Profits: During the second half of the 1990s the SP500 climbed roughly 300%. It was the greatest bull market in U.S. history. At its height, the price to earnings ratio was north of 36, books were printed declaring a new ERA, Dow 35,000 and teenagers were newly minted millionaires based on their strategic investments in AOL and Global Crossing. It was a great time to be an investor. But alas, bubbles deflate or get popped.
But what you may not realize, in light of recent swings in the stock market is that during this five year run, there were 10 occasions when the market sold-off by more than 5%. Like I said, nothing to get too worried about. Yesterday, we went over the risks of going long (buying stocks in anticipation they will rise in value) on the markets and realized the total downside risk from here really isn’t that bad. From a psychological perspective, the losses seem far worse. Studies by financial behavior experts, a new field of financial markets that tries to quantify the psychological side of the markets, (yeah I know -- pretty hokey) estimates a loss as 2.5 times the emotional impact of an equivalent gain. For those of us that sold into the bear market in 2002 (your editor was even selling a little bit over that summer when the markets looked like they would never rebound), we know now that we missed out on getting in at the start of a five-year bull run. And that comes down to what I look at as the American way. The U.S. was founded on measured risks and weighing the potential upside against the downside risk. Remember, the U.S. was created by a group of traitors who risked their limited freedom (low risk) for what they thought would be a great society (big reward). To me, that is the American way -- constantly measure risk and reward and act accordingly. That’s why I’m starting to turn cautiously bullish. It’s not time to dive into the markets with all you’ve got -- the banks still have a lot more problems to get sorted out -- but wading in and picking away at some top-notch stocks that are on sale is the right move to make now. That’s how multimillionaires that have financial freedom and live the dream are made. Good investing, Andrew Source : Fear and Greed This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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