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Time to follow the herd? November 20, 2008

Posted by shaferfinancial in Uncategorized.
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We are in the midst of a great bear stock market on the back of a real estate devaluation.  Once good solid companies are now begging Washington for cash to bail them out.  Talk show maven, Cramer, is talking great depression.  The internet is full of people predicting the total annihilation of individual savings.  Jobs are being shed at a prodigous rate.  People are selling mutual funds and stocks out of fear they have taken on too much risk.  Perhaps you have had those thoughts, or perhaps you have already sold.

Let’s be honest, these are scary times.  Now here is the other side of the coin.  Times like these are not all that unusual.  In our life times we can expect at least 5 bear markets, with two seeing stocks drop by 40% or more.

If you knew this, and expected it, then you could have a plan for these times, no?  But you don’t, do you?  Now, I am not saying that by having a plan, you can solve all that ills you.  Just, that you would be much better off if you have a plan because you would be less likely to make a serious mistake.

As an individual investor you can actually behave more smartly, than institutional investors.  For example, pension fund managers are currently trying to get Congress to change the law about their pension funding. As businesses do poorly, they have less cash flow, so they want to underfund their pensions during this time and play catch-up in the good times.  Current laws don’t allow them to do that.  And mutual fund managers, who are having record amounts of money being pulled out, are forced to sell their badly performing stocks so they have enough cash for the outflows.  Index funds have a bigger issue when they have to support outflows and rebalance their funds to keep mirroring the index.  This forces them to buy the poorest performing stocks!

This is exactly the opposite of what institutional investors should be doing.  They should be buying solid companies that are on sale, like Warren Buffett.  Last post I pointed out the companies Warren was buying.  These companies almost universally had a P/E ratio of less than 7 and dividend payouts in the 4-5% range.  One critic even wrote that Buffett was becoming a dividend investor (an investor that looked for companies with high dividend payouts).  The point was that Buffett found companies that had consistent cash flow, good fundamental businesses, good management, that were beaten down in the bear market to points where the dividend payout was now significant.  It was the price that attracted Buffett.

You can do that too.  No need to become an expert in all stocks.  Pick a couple of companies and do some basic research.  Think through their products.  Look at their debt structure.  And decide on an entry point.  When the price gets down to your entry point, then buy and wait.  If you have done your research, you will have confidence in waiting.  In this way you can manage your money better than any institutional investor can manage theirs! 

And one thing history tells us for sure, is that eventually it will turn around and the herd will start buying stocks pushing them up to crazy values.  Then you will feel much better, and if you follow the advice of Warren Buffett, be in a much better financial position.  If not, if you follow the herd, then you will feel better, but really be in the same situation as you are now!  Your choice!


Recently, insurance companies have been pressing their agents to sell the fear.  Meaning convincing folks to get out of stocks and buy annuities with guarantees eliminating downside risk.  If you currently, have money in the market, don’t fall for this, no matter how painful it is to watch your values go down.  Now is not the time to sell, period.  If you are getting ready to retire, you probably need to put it off a few years to allow the market to come back.  Then you can look at moving some of your money to immediate annuities for the lifetime guarantee.  Annuities are great products when used right.  Avoiding market risk while you are working, is not a proper use in my opinion.  Tying your money up for 3-5-7-10 years in a low interest rate environment does not make sense to me.  Now, if you already have the wealth, then there are other strategies that have much lower fees associated with them and will give you better returns.



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