By John Reizner |
The stock market erosion that began in the second half of 2008 when the Dow Jones Average was slightly above 13,000, has built into a sharp and nearly relentless stock market collapse from September 2008 forward. The Dow is now trading above 8,000. A popular pundit declared on his widely viewed show on a major financial television network that long term investing is dead.
The current bear market is already comparable in severity to the terrible 1973-1974 market, and may even approach the pain of the 1929-1932 declines before it is over. Reasons for this may include of course, the frozen credit markets, excessive public and private debt which may inevitably lower living standards in our country as the debt is worked off, or a lack of confidence by wealth holders in the likely policy initiatives of the incoming Obama administration, the latter which may cause further problems for the dollar.
I made the case on my website as early as April 10, 2007, in my article, Are Stocks Still Worthwhile Investments: A Reconsideration; The Odds of a Panic, that there was an unsupported speculative fever in the stock market. I have made numerous comparisons of the recent economic and stock market events to those of the 1970's, when high inflation and unemployment, poor stock prices, and lofty oil and gold prices ruled the day.
There are some in the current bear market, who are dismissing the long term investment techniques practiced by such investing geniuses as Warren Buffett and others of his kind over the past few decades. In fact, the technique of security analysis from which Buffett's methods originally emerged, was out of the thinking of Benjamin Graham during the Great Depression. Security analysis was born during the bear market of the 1930's, when common stocks were viewed as dismal investments. In fact, it may be argued that investing for the long term during extremely depressed stock markets may provide good investment outcomes over the long run.
I am attempting to make the case that long term investing has not been relegated to financial history, and that an investor may be wise to hold long term common stock and mutual fund positions as long as one is properly diversified across industries, countries, and asset classes (such as gold and foreign currency money market and bond funds). Diversification may help the investor manage a bear market in stocks. I believe that diversification is most important when we are in a long term bear market, as we are now, in my opinion, and until we may again enter a new long term bull market in stocks.
Making strategic decisions with one's portfolio during a bear market in stocks can be useful. I have selectively made strategic buy or sell decisions for various stocks in my portfolio while still maintaining a very significant common stock exposure. For example, I sold HSBC and PNC Financial after the Shanghai stock market downdraft of February 27, 2007.
Our stock market followed suit after Shanghai and declined, with many bank stocks declining sharply. Bank stocks were still trading then at high prices (especially compared to today's prices).
I recognized in August 2007 that a decline in financial issues represented a potential breakdown from a long distribution pattern in these stocks (when shares are unloaded by informed holders to weak or less informed holders). However, even though I sold Wachovia at 56.45 and MBIA at 55.37 stocks during this time, my remaining portfolio has been meaningfully affected by the late 2008 severe stock market decline.
Of course, the subprime credit crisis was a high risk to bank issues. In my August 8, 2007 article, I wrote that the credit crisis might cause further pain in these issues, and that one should only consider buying the stronger banks less affected by subprime holdings at lower price levels.
I have stated previously that the future should see another long term bull market in stocks (which may not emerge until after years of a trading range bound market). In fact, if our economic system does not buckle completely, then the Federal Reserve aggressive pump priming of the money supply and repeated government bailouts, may result in a terrible inflation problem in the coming years. The Federal Reserve and the government seem to be trying to repeal the business cycle by attempting to inflate away our debts. The types of investments that may do well under this scenario are inflation hedges such as gold and oil.
We have seen in recent months the price of oil (currently at $44 per barrel) collapse from $145 and gold trade recently at $768. The early 1980's high for oil of $40 per barrel, and again reached in 1990 and 2000, may actually act as support to the oil market at the current level from which the oil market may rally. Gold may be working off a correction, though may trade lower before it resumes a strong uptrend.
I have recently added a new position in the Franklin Templeton Hard Currency Fund and shares of the Barclays Bank IPath Exchange Traded Note USD/Japanese Yen Exchange Rate, the latter which increases in value if the Yen rises against the Dollar. I maintain my position in the Templeton Global Bond Fund, gold coins and bullion, selected oil and oil service firms, and various mutual funds and common stocks as well as invested cash.
I believe that it may be consistent with the tenets of successful long term investing to still hold through this bear market a position in selected common stocks and mutual funds. In the next long term bull market some years away (notwithstanding cyclical, or short term bull markets), these investments may do quite well, if the long term record of stocks is any guide.
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