Going Against the Flow

FYI, as I post this, it's 9:55 am on Thursday, August 16, 2007. The post won't go live for another hour or so, during which the market may tank more, go up, or remain flat. Whatever happens, it won't influence my thoughts and convictions detailed below.

With all the doom and gloom over the stock market, the real estate market, the economy, etc., I thought it was time for me to comment on what I'm doing during these "troubled" economic times. As usual, you can take what I'm about to say or leave it. I'm certainly no expert, but I can say that I've done well the past couple of decades following what I'm about to tell you.

Here are my thoughts:

1. It's hardly ever as bad as people think it is. The media feeds the frenzy that the sky is falling because that's what the media does (see U.S. stocks set to tumble over credit worry and New home construction slowest in decade as examples). But the hyped-up fear of the unknown is usually worse than reality. And the market is currently reflecting the full force of the (unknown) bad news. (Yes, additional "bad news" may send the markets down more, but that's because of what happens due to point #4 below.)

2. If it does turn out to be as bad as everyone thinks it is, that's already reflected in the stock market. At some point, it will reach the bottom and go no further. I personally believe that we're not far from that point.

3. If it's worse than everyone thinks it is, I believe the US economy is strong and resilient enough to bounce back. It may take a few years (like with the Internet bubble), but past history will show that the economy usually comes roaring back. And if the US economy goes into a downward tailspin and never recovers, we'll all have much more to worry about than if our investments are doing well or not.

4. When everyone says things are really, really bad, that's the time to buy stocks. The market is a herd of lemmings following one another up in good times and down in bad times. Lately, there's been so much negative press about the housing crisis that everyone's saying the bottom's falling out. And when everyone begins to act on this information, it becomes a self-fulfilling prophecy. But the basic, fundamental value of most of the S&P 500 stocks has changed very little in the past few months. Yeah, they may take a hit for awhile, but when the tide turns and the lemmings start to say things are all better again, they'll skyrocket.

5. These four reasons are why I'm currently going against the flow and buying extra shares in index funds (i.e., buying stocks on sale.) It may take years for my current investments to pay off, but it may not. No one knows. But whenever they do go up, I think they'll go up strongly.

6. Why are the "keep your debt and invest instead" advocates silent lately? And those who thought zero-interest loans and all the other wicked forms of debt are pretty quiet too. What happened to their boldness? :-)

7. In short, it's times like these when cash and no debt are kings. If you have no debt and a decent amount of cash, you can get a piece of property for a steal of a deal. This is one reason I'm currently in the market for a new home. I can get a place worth twice what my current home used to be worth for 20% to 40% (or more) off it's "worth" a couple years ago. And why can I do this? Because the housing market's in the tank and I have no debt and enough for a good down payment even if I don't sell my current home.

8. How did I get myself in such a good financial position? By following the principles I write about here every day. The principles I write about aren't theory to me -- they are what I do myself, and that's what I share here. And they work -- if you stick with them over time and just keep doing the basics. I'm not trying to brag -- there's nothing to brag about -- this stuff is so simple that anyone could do it. But there are often a million miles between knowing what to do and actually doing it, and that's the reason many people aren't better off today.

Ok, I've blathered on for long enough now. In short, I'm going against the flow. I may be wrong (heaven knows that wouldn't be anything new) or it may be years before I see the fruit of what I'm doing now. But I'm willing to take those risks because in the end, it's never as bad as it seems and things are bound to get better.

Mary Poppins, signing out. ;-)

Comments

[Brad]

As for #6 . . . I'm one of those "keep your mortgage and invest" turkeys, and I haven't changed my behavior during this time. Well, I have, and as you mentioned, I am buying more than I would be otherwise. Like you, I think this is short term hysteria and the market plunge has very little substance. Now is the time to hang on, buy in, and wait. I don't know how short term it will be, or how much lower it will go . . . but I want to be sitting pretty on the other side.

[arun]

You are absolutely right. if you are a long term investor and have cash to invest you investing at these times when everyone is selling. the idea of investing in mutual funds and not individual stocks is that you trust the manager to do the trading and you should not have to. Add more money to your funds and let the manager do the selling/ buying. In the long run it will always work out. Good luck.

[Brad]

Or better yet, buy a fund that doesn't use a manager (index fund). Save yourself some cash and don't put your trust in people who lose to the index 70% of the time. :-)

[Teri]

I'm not sure about #6 - I am pretty big on 0% loans and investing instead of prepaying my mortgage, but I am not having any problems. ;)

My long-term investment strategy still stands and my short-term 0% financing was locked in at 6% CDs because I could see this coming from a mile (or 2)away. I started to wonder if I was too rash in all the CDs and attempted market timing but I am feeling pretty good these days. Regardless I Wasn't going to borrow 0% and put it in the stock market if I had to repay it in the next few years, I am not an idiot.

Ironic since today I was just thinking that with a sound financial play none of this means little to our family. We don't "rely" on debt for anything and my job is rather recession proof. Not many worries here. My 0% financing and other cash will give me some pretty decent returns in what is looking to be any iffy year for my stock portfolio. So win win.

[MFJ]

Share your sentiments and put about 7 more limit orders in last night. I have a question about #8 though. Sounds like you would be "upgrading" to a newer house. While the math is still on your side don't forget that because the market is down when you sell your existing house you will have to sell that at the "lower" prices that you are taking advantage of when buying your new house.

Now granted if you buy a more expensive home at a the same discount you sell your old one you still come out ahead and the fact that you could keep the old house without having to sell right away also bolsters the case. Ok fine it sounds like you thought this through :-)

[Own Your Own Decisions]

I think you are spot on with this, except that there is a loss of billions of dollars in failed mortgages and more to come for a couple of years. This has to come out of somewhere, and I don't think we've seen the drop finish yet.

[FMF]

The market's down big so far. If it stays down, I'll be putting some more into an index fund about 3:30 pm today.

[Bronco]

I applaud your boldness, but do not forget about March 2000 when the market tanked for two full years. We must learn from our past, lest we repeat it in all its gory misery.

[FMF]

Bronco --

Yep, I bought all the way down that time too. All those purchases looked pretty good five years later. :-)

[Matt Wolfe]

I couldn't agree with you more that people just need to hang in there. In the long term, this is merly just a blip on the stock charts. The fundamentals for all of my holdings all seem strong, they've just dropped due to unjustified panicing.

[Bronco]

panicing, yes. but unjustified? on what do you base this evaluation?

[FMF]

How will the mortgage crisis impact companies that are totally unrelated to the mortgage industry? Very little. (Yes, there will be some impact, but not dramatic.) And yet, while the fundamentals of those companies have not changed (and we're talking the vast majority of the S&P 500 here), their stock prices are taken down with the rest in this big over-reaction.

It's the lemming mentality at work.

[Bronco]

To a degree, I would agree with you FMF. But, as people's ARMs reset (up!) they will have less disposable cash that feeds into the rest of the economy, ie retail, consumer electronics, etc...

[Lord]

This is the caution that recession may lie ahead. All this bad debt must be worked out. I would prefer to see a bottom first and then pounce. Markets are less efficient when things happen so rapidly as there is less time for dissemination of information. Keep your debt and invest, as long as you don't need your returns to pay it off.
That is too risky even for me.

[Tim]

unlike 2000, there are plenty of companies that have no exposure to subprime mess. the fundamentals of those companies haven't changed, except people are panicking. i'm with others, buy, buy, buy. that's what i've been doing this past week. remember the markets are still up for the year. people forget this in the wake of the wild waves the past couple weeks.

it will be some time before we actually know the outcome of the subprime mess; however, people forget that subprime loans are a very small portion of the mortgage market. people are acting like it is 50% of the mortgage market when it is under 10%. even then, not everyone will be foreclosing or defaulting. are there funds that invested in some of these mortgage companies? yes, but again, we're talking minor amount in the big scheme of things. as soon as people start to realize this and stop panicking and the actual impact numbers come into play, the markets will calm down again.

recession? not in the near future. let's just hope that people will relook their credit exposure after this. i doubt it, but it is a hope.

[FMF]

Lord --

You said:

"I would prefer to see a bottom first and then pounce."

This is a GREAT strategy. Can you please inform us all when the market hits bottom and will only increase from that point. Then we can all buy in!!!! ;-)

[Bronco]

now that made me laugh!

[JGInvest26]

I agree with Tim. The reference to the steady drop from March 2000 into 2003 is way off base. People were paying absurd prices for technology companies that weren't making any money! The S&P 500 P/E ratio was over 30, right now it's not even half that (read: companies have the earnings to back up the recent run-up the past few years.)
FMF you're right on. If you are a long-term investor this dip shouldn't affect your strategy.

[fivecentnickel.com]

JGInvest26 beat me to the punch. Current P/E ratios are half where they were in 2000. This is a *much* more reasonably priced market.