One of my friends and clients here on Kauai is a personal financial planner. If you want to know more about him, check out Personal Financial Consultants, Inc. That's Loren's company. Talk about a rough business to be in these days. Makes real estate seem like a walk in the park. Loren has an office in downtown Kapaa and is available for clients both on island and on the mainland. Whenever the market goes on a roller coaster ride, he usually has a bit of calming insight. I particularly liked what he said in his message yesterday and he is allowing me to publish it here. When I went to bed last night, I was watching the foreign markets start 10% lower. When i awoke early this AM, the market was under 8000. But, it did finish higher although it was a brutal week to be sure. How you find some wisdom in these observations.
Loren says...
Let me outline what is going on, what is real, what is permanent, and what is temporary.
The credit markets have seized up. This is real and it is temporary. Almost all large public and private companies issue commercial paper - short-term debt instruments that mature in less than 270 days to help meet their short-term liabilities. This debt in the past has been very liquid and quite secure. It is what has been owned by most money market funds to help them give savers better returns than they would get from owning Treasuries. Since concern has dramatically increased about corporate balance sheets and their ability to meet even the shortest of obligations, two things have happened. People have fled money market funds, which means that those funds must sell their paper and there is no market for the new paper that is being issued. When you heard about the "need" for a rescue package, this is the main reason why. The Fed and the Treasury are trying to create an avenue of liquidity for these instruments. This part of the plan is what will eventually hit Main Street. The reason that this is temporary is because it is too significant to not be worked out. Everything from hospital payrolls to inventory purchases are dependent upon this mechanism, so it will be fixed.
Wall Street is broken. This is real and it is permanent. Some of the largest investment banks were using a tremendous amount of leverage on opaque instruments that created even more leverage. This industry will continue to change and change dramatically. Access to money will not be as easy, which means profits for these companies will be compromised. Eventually they will come up with new and different ways to make money, but regulation will inevitably make it harder to make as much as they did for contributing as little as they had. This will inevitably change what types of investments will make sense going forward. Less exotic will be back in vogue.
Diversification doesn't work. This is real and it is temporary. When we have a global melt-down, all investments, other than the very safest, fall. This means that asset classes initially fall together. And this is usually the case for around three to six months. After that, the most mispriced asset classes come back more strongly than others. Making sure that you stay balanced, take profits in upturns and stay invested in downturns is critical during these periods. It has worked for us time and time again in my twenty-nine years in this business.
Fear and greed own the day. This is real and it is permanent. Every day, stock prices are determined by sellers - who either need to raise money or are convinced their stocks are going down, and buyers - who believe that they are getting bargains on investments that will go up. In periods of turmoil, there are far more sellers than buyers. People get scared that their investments are going to fall forever and sell (often at the worst
possible times). When markets are going up, people think that they have all the answers and end up buying at the worst possible times. No one is ever completely rational, but successful investors tend to be less scared and less greedy than unsuccessful ones.
Valuation is never completely clear. This is real and it is permanent. You can pay thirty times annual earnings for a stock that is growing at 30% a year. You cannot pay thirty times earnings for a stock that is growing at ten percent a year. All future growth rates are guesses. This means that on a daily basis, you are never paying the exact right amount for what it is that you are buying. In markets like this, though, you are generally paying less for future earnings than you did in 1999. These low prices are ultimately the key to having success in investing over the next few years.
People are hurting. This is real and it is temporary. Jobs have been lostand more jobs will be lost. People who piled on debt will have tremendous problems working their way out of the hole that they dug for themselves.The stress of seeing investments drop can add to the stress that each of us feel in raising a family, or work, or retirement or tending to our aging parents.
But the one universal truth of these times is impermanence. Nothing lasts forever. Lower interest rates will eventually lead to a housing rebound. Enhanced credit will help businesses expand and hire. During times like this, don't extrapolate what is happening today to fifteen years down the road. Focus on the things that you can control. If you have a well-reasoned strategy and plan in place, you will be fine. We have worked with countless clients over two decades and have helped them retire comfortably and send their kids through school. We have seen many types of markets during these times and through solid financial planning and intellectually sound asset management we have weathered the tough times. We will do so here as well.
As a final note, Warren Buffet, the head of Berkshire Hathaway and the second richest man in the world, has taken on iconic stature in our society.
He plays the wise old grandfather whose advice is always right -sooner or later. He has a very rational take on the current situation. My take away is this: Buffett has great confidence in the long-term health of the American economy. He has sat on $40 billion in cash for years waiting for
the right buying opportunity, and is now putting that money to work.
If Buffett is a buyer, then I would not be a seller.
