I’m a skeptic, a pessimist. I realize that there are good enough reasons to take my hard earned savings and attempt to grow them over the long run, but I’m never euphoric regarding that growth. I always try to take a look into what risks a new investment might pose and try to evaluate whether it would be a smart choice to jump in.
I haven’t been investing for a long time. I started to learn about it only after as a family we have agreed on a long term plan to build our savings. Once savings are accumulated, I would have taken the advice of the financial books and try to grow them to avoid the erosion of inflation. That was the goal. That was the thought – no greed, no over confidence. I decided to study, understand, before jumping in the water. In the meanwhile, seek the safest long term opportunities.
As I took interest in the market, I was looking for risks. I was looking for what could be wrong with the market at this point. I looked out for every possible pessimistic opinion on the web. I found it – decided the market is due for a harsh correction, and decided that my first move would be somewhat defensive.
In January 2007 we began saving money in a money market account and in a brokerage account in a mutual fund. The mutual fund I chose was somewhat volatile but very consistent over 9 years – FNMIX, which is a developing markets bonds fund. I recognized that the last time it had show bad results was a result of a global catastrophe and I did not anticipate one at that time yet. I intended to begin saving there, and over time diversify to other mutual funds (not more than 4) – so that our money would not be focused in one asset class.
What reasons did I have to be weary at that point in January 2007?
- The market was in a bullish trend for a couple of years. The market tends to correct itself and regardless of the trend, the market never goes up in a straight line.
- The housing values were heading down. There was growing concern regarding subprime mortgages. There were stories about it to be found back then, and they scared me enough. I did not have enough economic insight to deduct what would follow, and I believe very few did.
- Federal Interest rates were high. This usually leads to market peaks.
- The USA was (and still is) involved in a war. The deficient was (and still is) out of control and the USA was investing money into Iraqi infrastructure, which I perceived as money down the drain. (from financial standpoint, no political stance taken in this blog)
Where did I go wrong? The market had continued its bullish run from the middle of 2003 up to the peak in October of 2007. Not in a straight line, and with plenty of scary moments for investors, but the market had gone up. The S&P 500 went from 1409 on January of 2007 to 1562 in the peak. That’s 10%.
The first lesson I should have learned there and then is that as long as the market is in a bullish bias, measured by which side of the 200 days moving average the index is at, it’s in a bull mode. Fundamental risks do not change the investors’ sentiment, and it is a shame not to take advantage of this sentiment.
By summer 2007, I felt we have saved enough money to diversify to a stocks based mutual fund. It was the plan to begin with, and I have proven myself wrong with my pessimistic assumptions about the economy and the market. Although hindsight proves this move to be wrong, there was no signal of what was coming.
We had the first credit crunch in the summer of 2007. My tiny investment in a value based fund (still trying to be defensive, not going into a growth fund) had been losing money every single day. I spooked and took the money back to FNMIX in September.
Now here’s the most confusing part about it all. At September, the potential risk to the market was a known thing to everybody. The subprime mortgage mess and the credit crunch caused a strong enough correction to get everybody’s attention. But when the Feds dropped the interest rate, the market rallied. That was a euphoric move. This is what I recognize in hindsight. It was the opportunity to take your money and run. The market fundamentals did not change and later have worsened far more.
In the end of September 2007 I rolled-over a “mutual funds” based former employer sponsored IRA to Zecco. The idea was to get investing practice with stocks. I felt I had observed and studied enough to get my feet wet. Like all studies in life, you are never really done, but the only way to advance my knowledge was to get a little wet.
As one trading book I read suggested, succeeding at first is a bad omen. It gives you too much confidence. I did too well for my own good. I even expected a market correction in January of 2008 and adjusted my portfolio to hold some short ETF-s.
Since January of 2008 though, I’ve done really bad. That’s what I believe has taught me the most important lesson I hope to remember well into the future. I’ve become a believer in the theory that says that when the market (measured by an index like S&P500) is under 200 days moving average, there’s a bearish bias – and at harsh conditions (like since September of 2008) nothing can beat it, so I should not try to be smarter than everyone else out there. My position in FNMIX was liquidated last week – I took the huge loss there because I saw too much risk and I didn’t anticipate it to get better. I have no clue as to what will happen with that asset class in the future, but I made the decision to reconsider again only in 2010. By that time I will have enough impartial distance to reexamine the state of the stock market as well as the bonds market.
I maintain that at all times, before and while holding some investments, be it in a retirement account or a brokerage account, we should always try to assess both sides of the coin. There’s always a bullish case and a bearish case. People should develop their own system to assess their exposure to risk accordingly.
Here are some bearish current perspectives (which most people are already aware of):
- The credit crunch is not over. Banks are still hording cash. Houses are still losing values.
- The national deficit is not contained
- There’s political uncertainty, and uncertainty regarding market reaction to election of either candidates
- We are facing a global recession
- We don’t know which financial institution is to fail next, and are still expecting more failures
- There’s lack of trust in the government’s attempt to curtail the crisis
- There’s lack of trust in the market and in its efficiency to price companies
- Dividends of companies are in question as profit margins shrink and at some cases losses amount
- The market is very volatile, wrong decisions could cost a lot of money.
- Fundamentals based research is wrong because an upcoming recession is guaranteed to adjust earnings predictions downwards.
- Emerging markets could default; a rising Dollar means a harsh inflation to the countries around the world.
- Geo-Political threats are at all time high (Iran, Russia – I won’t go into that because it is politics, but it’s out there)
Here are some current bullish perspectives:
- Collapsing commodities prices could mean a surprising purchasing boom during the upcoming holidays
- The market could have overreacted and a subsiding selling pressure could result in a new relief rally in a bear market. This relief rally could result in new bull rally if the bears are caught off guard. At that point the indexes could cross zooming above the 200 days moving.
- The distance between the 50 days moving average and current S&P500 is 18%. That would be the first counter trend rally. The distance between S&P500 and the 200 days moving average is 33%. Those two rallies would still be bearish feel good rallies.
- Warren Buffet wrote an article in the NYTimes urging people to consider buying now. Then Buffet took positions in GE and Goldman Sachs. Buffet perspective is that this might not be the bottom but he sees enough values at these levels to assume both positions would be worth much more in the upcoming years
- Gold is in a bearish trend. So is oil. These things usually happen during a recession and lead to a few years of growth.
- Rates on money market accounts and savings are very low, at some point savers would prefer the risk of the market to receive the high dividends, as opposed to the laughable money market dividends.
- A collapse of global markets could lead to a flow of international funds back into the US stock market.
- The banks and politicians might have learned their lesson and would from here on stop issuing risky and dumb loans. The whole financial system model is going to change for the better. (Yea, right – I’m not fooled, are you?)
- There are fewer new homes built, and a better chance for current inventory of empty homes to subside.
- Bear hedge funds are about to take their wins and hide in cash. Case in point, Volkswagen. Neither a bull nor a bear want to overstay their position.
One more point. If you look at the monthly chart for the S&P 500 over years. And add to that the stochastic oscillator, you would notice something astounding (as Don Harrold did). In the peak of October 2007 the stochastic has reached that magic “overbought” signal. In October 2008, the stochastic has reached oversold. Like I said before, technical analysis of stocks is not a precise science, but it does measure the odds. The odds at October 2007 were for a major correction to the down side. The odds at the middle of October 2008 were for a major upwards correction.
I’m glad you stayed with me thus far to have read this whole thing. I hope you enjoyed this post. My major point was: Always assess both bullish and bearish case. Surprises will arise (as did the developing markets debt did for me), but having a plan for those surprises will save your savings.
Cheers!
Sivan Segev | 
12 21st, 2008| 
So I’ll link back to my own 
Summertime [(Big Brother & The Holding Company-Janis Joplin)]
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