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Sunday, November 16, 2008

Hard Times Investing: Just thinking aloud

Now that there is no doubt that we are in a recession, we need only guess how long the recession will last and how brutal it will be. A 5% decline in GDP would not surprise me, nor would 10% unemployment. Is a depression coming? We have already had a depression era meltdown of our financial systems, but I sincerely doubt that we will meet the definition of depression by suffering a 10% decline in GDP. However, this might still become the worst recession in our history. If oil prices spike again, I’ll guarantee it will be the worst.

At the worst of this market crash, the value of my portfolio was down 18% from its high point while the S&P-500 was down roughly 46%. That market low point was tested a few days ago and normally I would have taken that as an opportunity to follow my guidelines and do my buying for November. Instead, I lost my nerve and decided to sit tight. My allocation currently is 44% equities and 56% cash. The amount of cash I have left should last the rest of my life provided economic Armageddon does not take out my pension, and provided I am not foolish. It may be best that I not put more cash in harms way before I do some critical thinking, which usually requires that I do some solemn drinking. Three fingers of bourbon please, with no ice!

On the far side of foolishness, I am tempted to say, “Screw everything, we are all DOOMED” and squander what cash I have left on outfitting a boat worthy of some heavy-duty Lake Michigan cruising. My budget says that my available cash would purchase and float that boat for 10 years. My budget does not include income from Social Security, so if Social Security was available to kick in 10 years from now I could continue to float the boat, otherwise my finances would sink. Nah, betting on Social Security being around is not an option for me. I will NEVER count on the government to feather my bed. The boat idea is again out of the question. Damn!

Stock markets have only one absolute “support level,” they can go no lower than ZERO. Aside from that icy fact, any conceivable stock market scenario is possible. We all doubt that the major markets will become valueless, but they have dropped to within a nudge of 50% market losses. Many investors are wondering if the markets can drop to levels of 60%, 70%, or even 80% below their high points. Many are wondering what the markets will do AFTER hitting bottom. Will markets trade sideways in a narrow range for a decade or more? For the markets to sustain a rally, they need investors with money, investors with the ability to leverage, investors with the courage to invest, and there has to be at least the scent of a growing economy. We come up near empty on those requirements. The credit market crash, along with the equities market crash, has temporarily crippled some of the institutional investors. Many individual investors are saying “never again” to stocks and mutual funds. Yeah, the markets look bleak; the markets suck.

The minimum requirements needed to live through this economic epoch are prudence, prescience, and patience. I am hearing more “experts” telling investors to sell out of the markets at these near 50% loss levels. Since “experts” are usually wrong at market highs, and at market lows, normally I would take their “expert” advice as a good sign, but I am scared that more “unknowns” may drive these markets much lower. Maybe the “experts” are right this time; I am not prepared to promise that they are wrong.

My being scared may also be good sign, since I truly believe the markets will not turn around until everyone loses faith. I don’t know about you, but my faith is gone. The future looks dark and cold. Perhaps it is time for me to suck it up and buy more equities after all. If ultimately I win, I may be able to buy that boat I lust after and possibly still have enough cash to last until the end of my days. If I lose, I’ll have plenty of company in the soup line, remembering what once was, and wondering what might have been.

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