Ted Allrich is the founder of The Online Investor and author of the just released book: Comfort Zone Investing: Build Wealth And Sleep Well At Night. In this weekly column, he'll offer advice to investors who are just getting started.
Everything is changing. Much of what used to be is gone. Wall Street firms are no more, morphed into banks or simply disappeared. It feels like the end of an era. And so it is.
Change always creates anxiety. Investors are dealing with more change than usual these days. And questions. There are so many questions with no answers that stress levels are reaching new heights. What about the government bailout? Will it work? What about all the bad mortgages? How many are there? Will they all default? Are stocks still a good investment? Are all investments bad? Does money belong in a strong box under the house where at least it's accessible? Will I keep my job, my house? Will the banking system fail?
It's like everything is suspended, caught in a time warp, waiting for something or someone to move the economy forward. Suspended animation, as it were, where investors are frozen, watching but unable to decide what to do next, afraid to buy anything, unable to sell most investments because of low valuations. What should investors do?
Get back to the basics. While the whole worlds seems to be ending, it isn't. Some proof: huge stock buybacks from companies like Nike Inc. (NYSE: NIKE) ($5 billion worth), Hewlett Packard (NYSE: HPQ) ($8 billion) and Microsoft Corp. (NASDAQ: MSFT)($40 billion ) (for a complete list of current buybacks, click here. These companies are thriving, not just surviving. And some of the banks, most notably Wells Fargo & Co. (NYSE: WFC) and Bank of America Corp. (NYSE: BAC) are well above their low points (up 81% for BAC and 75% up for WFC). If the banking world were going down for the last time, these stocks would be hitting new lows. So give up on the idea that Armageddon is here or coming any time soon.
The basics, the essence, of investing gets down to earnings. It's what you own as a stockholder: the future flow of earnings. If you do strong due diligence on a stock and find one that has increased earnings every year (especially in the last one), you've got the best chance of doing well in this difficult environment. After all, every investor wants stocks that go up, and stocks with increasing earnings go up. If you've discovered some that are bargain priced right now because of current economic troubles, you'll be well rewarded when some of the above questions are answered and animation is no longer suspended. Not all questions will ever be answered until events run their course, but when some of them are, the stock market will move higher (assuming the answers are good).
Fear and greed run the market. There's no question what's gripping investors now. In fact, it would be hard to find a greedy investor, except maybe Warren Buffett who is reported to have turned greedy after years of fear. That doesn't mean you should get greedy (ever), but it may suggest that getting more involved in the stock market rather than less will be a smart move. Buying fewer shares than you normally would of the best stocks, establishing initial positions, then adding to them if further erosions occur, may be a strategy that will pay handsomely when the market turns for good.
And that's another question: when will the market actually turn around and start heading higher? Again, no one can tell. But remember the stock market looks ahead by at least six to nine months. It's not focused on the now. An upward trend will return well in advance of any real news that underpins it. Indications of better home sales, higher retail sales, more car sales, and stronger general economic data will be reported long after the market has moved ahead. When that is, no one knows, but it will happen. It has ever since the Dow Jones Average started in the late 1890's.
Yes, these are the worst times since the Depression. They are very unsettling, disturbing, stressful. But they will pass. Just don't expect anyone to tell you when or how. Those are still works in progress. Caution is the best approach. To do nothing or to make fearful decisions aren't the best options. In fact, they're most likely the worst.
Comfort Zone Investing: The unmighty dollar
Five winners of a weak dollar
For a quick-read on the U.S. economy, check the price of gasoline
Reader Comments (Page 1 of 1)
9-28-2008 @ 11:23AM
andy said...
for now...Dividend paying Mutual Funds
9-28-2008 @ 6:36PM
Joe said...
I WILL NEVER TRUST ANY OF THESE SB'S AGAIN LETS SEE IF THIS GOES THROUGH THEY PUT ON WHAT THEY WANT!
9-28-2008 @ 8:10PM
nick said...
Keep your money in CD's and insured money markets for the next year or two. This market will have a lot of gains that won't last. Gold is a good way to go. Energy stocks, health stocks, and food stocks will be the way to go. Watch the talking heads on MSNBC and CNBC. The talking heads really like to talk the market up and down. These people are players big time, through third party folks. If you want to get an ear full go to the bars in the market area and lesson to these guys and gals talk after work.
9-28-2008 @ 8:30PM
Alan Walsh said...
I wouldn't touch the financial markets with a 10-foot pole. They are manipulated, corrupt, and rigged. There are no free markets anymore.
I wouldn't hold dollars either; not with the way the Fed's been shoving new "phoney-baloney" dollars into the economy.
Buy gold. Even though the government and it's finance house buddies have done their best to hold it down in order to negate it's warning effect as an economic barometer, gold has risen by fits and starts for several years. If you don't believe the manipulation, just consider the massive volume of short gold derivatives that exist; well in excess of the total market even though physical inventory available for sale is getting scarce. The commodity regulators refuse to take a look at it, even though much smaller manipulations by private parties in the past have drawn a strong reaction. The same thing has been going on with silver. Foreigners have been buying gold like crazy.
The U.S. economy is bankrupt, and the latest deal will just throw more fuel on the fire. We taxpayers will be expected to pick up the tab; possibly for generations to come.
The big finance houses will be made whole, with our tax dollars, to go on with their manipulations; and they've already proven that they don't have the American economy's best interests at heart. The same can be said of the Fed and the Treasury, which are run by executives from these same finance houses.
Do you really believe that these people are looking out for you? Is this the environment in which you want to gamble your money?
9-29-2008 @ 1:21PM
ANNMARIE49 said...
Stop giving money to these woman that keep having children, even when they know they can't afford them (WELFARE MONEY) PUT THEM ON BIRTH CONTROL OR THROW THEM OFF. Stop giving money to illegals, they come here and get more than the poor AMERICAS THAT NEED HELP GET. IF YOUR WHITE & POOR YOU GET NOTHING, BUT ANY OTHER NATIOALLITY GETS EVERYTHING.
Stop send millions of dollars to a war that we are fighting why should WE rebuild their country, They have lots of money to rebuild thier own country.
AMERICA WAKE UP WE CAN'T SAVE THE WORLD, WE NEED TO SAVE OURSELFS FIRST. CHARITY BEGINS AT HOME.
THIS GREAT NATION IS GOING TO POT WHY? BECAUSE OF THE REASONS I JUST NAMED AND SO MANY OTHER REASONS--
MAIN REASON IS GREED!!!!!!!!!!!!!!!!!!!!!!!!!
9-29-2008 @ 1:18PM
ANNMARIE said...
I will never agin invest my money --I'd go bak to the old days when ppl. saved the money in thier homes--get a very good savey depoist box at home and keep your money safe, you won't gain anything --but you will never have to worry about losing money again.
sorry but this is how I feel.