In October of 1987, after Black Monday, I told my clients that I thought they might be best served by turning a blind eye to the market’s volatility. That turned out to be good advice at the time. Today, if I were in the same position, I don’t believe I would make the same suggestion. There is no firm foundation to support profits in equities. You could argue that there are many companies with good fundamentals, good earnings and cash on hand. It doesn’t matter.

Psychology affects the markets as much as anything else. For all practical purposes, it may affect the markets more than any other single variable. A loss of confidence is much like a snowball rolling down a hill……………it gets bigger and picks up speed. The market relies on signs of improvement and optimism. It seeks out some hints of direction for the economy of next month and next year. When there is little to provide confidence, sell orders come in an avalanche, short selling steps up and people begin betting on falling stocks, not owning stocks.

This same lack of confidence can be seen in a review of major companies across the nation. With hundreds of new, costly regulations coming from the federal government, companies fear spending money. That fear extends to spending money hiring new employees. The regulatory environment has stymied business and produced a psychological malaise.

So as with the last article, my confidence is also damaged and my feelings about equities and their wealth-producing capabilities is at an all-time low. Stay tuned.

There was a time I believed that holding stocks over many years always produced a favorable outcome. That may have been true at one time. In our current economic environment, even when analysts have a favorable perspective on a stock, it may not be enough. Two of the stocks that I have lost big on still get a very favorable report from the analysts who follow both. Just as they did a year ago, they suggest buy, buy, buy.

Even those speculating in the options market like the stocks.  Problem is that they will likely continue to fall.  Psychology still trumps everything else in the market and the current mood is not good.

Bottom line……..don’t hold and hope……..when your value has dropped 10% and it is not just intraday volatility…………it’s time to consider bailing while you can. Feel free to ignore this approach. Just make sure to come back here in 6 months and reread this post. If I’m wrong, please comment. There are times it is good to be wrong.

As someone who had always believed in equities and the resilience of the stock market, there was never any reason to fear investing in stocks over the long term. My perception was that an investor was always rewarded if they had a long term time horizon. Much of that optimism has evaporated in the last year or so as real economic numbers seem to act as a lead boot on the brake pedal of any bullish sentiment.

Corporate Pessimism stalls Recovery
There is today an under-the-radar sentiment among corporations and money managers that the administration is hostile towards big business and other stimulants of economic prosperity. When the employers of millions of Americans are viewed as the enemy, as criminals or assumed to be nothing but opportunists, big business reins in new hiring, investment and research spending.

With real unemployment somewhere around 17% and stock market enthusiasm, analyst pessimism and economist predictions all giving pause, investor confidence and stock market performance are dampened for the long term.

Until a business-friendly environment returns to America, until corporate and individual tax rates are cut or allowed to remain reasonable, and until personal responsibility is endorsed as a preferred money-management philosophy, the stock market will languish.

Stock Market Results look to Government
The election results in November may provide a glimmer of hope, but real change is needed and that change must be away from recent change. Unemployed Americans are not investors. That lost economic stimulus alone is enough to deflate the markets with much less buying and much more mandatory selling. Those baby-boomers who would have continued to save and invest for retirement are instead faced with selling off investments just to survive.

The hope and change that America and the future of the stock market both need right now is a massive real and psychological change towards stimulating job creation, erasing the socialist take-over of private business and returning confidence to everyday Americans who can invest in their IRAs, mutual funds and retirement plans with a feeling of hope and excitement.

An Uncertain Business Climate
Big business today feels nervous and uncertain about the future. Small business see’s rising tax rates, tighter credit and fewer buyers, resulting in lay-offs and suspended expansion plans. It all adds up to the potential for a prolonged bear market with substantial losses in retirement plans and personal investments in the market. This would be the second time in a decade that investors took losses that were not fully returned.

For most of twenty-six years, I told clients that the long-term perspective of the stock market was generally good. We could look at history and find proof of that assumption. But those assumptions depended on democracy, free markets and the will, desire and entrepreneurship of the American people as catalysts for positive progress. Today is quite different.

The Future of the Stock Market; it’s Now or Never
Today, the market is very fickle, weak-in-the-knees and restrained.  Money managers and analysts know the environment is different, but few are shouting that belief from the mountain tops. Their firms rely on new investments, so a general consensus that says there is little hope is not good business.

In November of this year, and again in 2012, there are two chances to throw a life preserver to the trillions middle-class people have invested in the markets. It may be too late by 2012 if the markets have not been given some optimism and a healthier environment. The stock market used to be a good bet, but that was based on the assumption that America’s leaders supported business and democracy.

© 2010 K Richard Douglas

Mike was well known in the Southeast and particularly in the Atlanta area. He was the voice of reason every Sunday, providing listeners of WSB radio with guidance for their day-to-day money management. We had turned 57 on the day he died. 

He was also a principal in an advisory firm and often provided free advice just to help people out.  Keep his family in your prayers and thoughts this Christmas. He knew an enormous amount of valuable information about investing and money management and blessed others with his knowledge every day.

In November of 2007, the DOW still sat at over 14,000.  The fact of the matter is that I bailed out of the market and sold off my equity holdings near the absolute high.  WOW………..what a genius…..er……actually not.

Market timing usually requires being right more than once.  In this case, I made a great decision and sold my stock mutual funds near the markets high.  That would have been a monumental piece of brilliance except for one small problem; I didn’t get back into the market at the right time.  As a matter of fact, I didn’t get back into the market at all.

That was stupid.

This is the problem with market timing. You can get one side of the equation right, but it often requires that you get both sides right.  I hit the high but missed the low.  I didn’t even get back in close to the low.  That is missed opportunity.  While I preserved capital the last couple of years, I lost out on a tremendous opportunity to make some real money in recent months.

The Dow Jones Industrial Average hit a 12 year low on March 9, 2009.  Since that time, it is up 34%, and I missed out on every profitable day. Did I benefit by market timing; a concept I have not believed in since the early eighties?  Not in this case. Yes, I preserved capital when others lost 30%, 40% or even 60% in their equity funds, but I missed the bottom and that was a missed opportunity.

Another example that bears mentioning is the fact that millions of people continued to contribute to their 401k plans while the market has been in free-fall.  Was that smart?  You bet it was.

If you went to your favorite retail store and bought clothes for your wardrobe every week, you might consider paying full retail. The cost of your entire wardrobe would have taken a big chunk out of your household budget.  Those clothes are never worth what they cost the day you bought them, so paying full price resulted in an expensive wardrobe.

What if you only bought clothes from that retail store then they were on sale?  And just imagine the benefit to buying those clothes if you could get them on sale for 60% or 70% or 80% off?  Your entire wardrobe would cost considerably less.  If clothes appreciated in value, you would be really well off. 

For those people who continued to invest in their retirement plans over the past couple of years, they were buying the underlying equity mutual fund shares on sale.  As they got closer to March 9, 2009, they were getting those shares at a real discount. If they contributed $100 every payday to their retirement plan, they might have been buying three shares of each mutual fund two years ago, but they may have bought ten shares earlier this year.  When the value of those share increases, as they have in the recent few months, their retirement plans are growing at a great rate.

Did these people practice market timing? No, they did just the opposite, they ignored it.

Do I jump back into the market now?  Chances are, I will be better off if I do it now than wait any longer.  Do I know that the market will continue its sharp rebound? No, I don’t know that at all.  I do know that the market has been cyclical in the past, and a dropping market has always rebounded….eventually.

In summary, my message is this; market timing is for the birds.  Some people swear by it, but the truth is, everyone misses the top and everyone misses the bottom.  Good investors simply invest.  They invest today, tomorrow and a month from now. They trust the cyclical nature of the market and they wait.

Should a person who just retired ignore signs of a prolonged bear market and watch it drop? Chances are that these people should bail out…………….they may not need to put all of their investments back into the market in the future anyway.  For the rest of us, we just need to be consistent investors.  Ignore the impulse to time the market and invest like your future depends on it.  Get it?

Pessimism feeds on itself. We ignore the history of the market because we only see what is in front of our face. We rush to buy things we want at the store when they are deeply discounted, but we ignore stocks.  Why jump on a sinking ship?

This is why the markets don’t always make sense. We listen to emotions, we listen to senior politicians, we read articles in national magazines and we don’t see light at the end of the tunnel.

We have been here before. As a matter of fact, we have seen worse. We hear that this is a different kind of recession and maybe it is. We hear that the recession is worldwide, and it is. Unemployment creeps up and we hold onto our money with a death grip.

Out there in the darkness somewhere are a few contrarians licking their lips.

There were companies that were market leaders five years ago and they still are. There were companies with innovative products five years ago and they still exist today; and their products are still innovative.

Our culture moves towards new technologies and there are companies that manufacture and sell these products. They do today and they will tomorrow. While the stock of these companies is on sale, should a frightened investor ignore it?

Some people are taking advantage of these scary times and they don’t even realize it. Their 401k contributions continue to flow. What they may not understand is that they are buying mutual fund shares at a discount.

When you buy at a discount and your employer contributes to your savings, and those funds are bought at a discount, the net effect is good. Maybe this frightening psychology is misplaced.

Yes, we have a government in overdrive. They are spending money at such a rate that our grandchildren will be on the hook for the debt. For now, we might do well to concentrate on what opportunities exist right under our nose.

Should we listen to the doom and gloom and clutch our pocketbooks like tomorrow will never come? Maybe, but there will still be companies making good products and selling those products tomorrow and the day after.

Psychology can work as a science with good results. But psychological influence on people’s common sense can be a bad thing. It’s a good thing that those 401k contributions are almost invisible. That bad psychology cannot disturb those contributions.

And what about those contrarian investors?

Their psychology is wired differently. There is no gloom and doom for them. Today is a happy day. Tomorrow is a day filled with opportunity.

In five years, they will be laughing while they pat themselves on the back.

Remember 2009, they will say. That was a good year.

The bailout certainly has its pluses and minuses and is far more complex than the average taxpayer could understand. It requires an understanding of the markets and a historical perspective that only the best economists possess.

The premise of the bailout is simple.  We are a credit-based economy.  Individuals rely on credit cards to make purchases, to get advances and as a convenient way of conducting commerce on the Internet.  Companies need credit for a number of reasons including purchasing supplies, funding special projects and advertising.  When credit is not free-flowing; problems ensue.

Last October, when the bailout was initiated, our credit markets were at a virtual standstill.  This was hurting businesses and consumers alike.  The net effect on the economy was decidedly negative and the subsequent job losses have been only one indicator of frozen credit.

One has to understand that the Secretary of the Treasury and the Chairman of the Federal Reserve are smart people. So are the hundreds of economists, accountants and financial service experts they surround themselves with.  The steps they initiated in October were not simply knee-jerk, but based on what we learned from America in the thirties and the theories of some of the most respected economists of the past seventy years.

The original purpose of the bailout funds was to inject cash into the frozen credit markets.  Banks, hard hit by losses in the mortgage markets, had all but stopped lending money.  They were instead, desperately holding on to capital. The only way to encourage banks to start lending again was to provide funds to do so and to instill confidence in those lenders that they had a cash reserve.

The other concern of the Treasury Department, Federal Reserve and FDIC was the escalating number of foreclosures. This problem, due to the subprime loan crisis and adjustable rate mortgages combined with falling home values, was threatening to have a ripple effect throughout the economy.  The three agencies combined their efforts to help homeowners with loan modifications to reduce the number of foreclosures and help the banks with this process.

The mortgage meltdown already had a ripple effect.  Tens of thousands of securities derived from mortgages are held in mutual funds, hedge funds and in other forms.  This has caused an enormous problem on two fronts.  First, it has devalued these securities, which has led to the failure of the funds that hold them and even the financial firms who have held a big stake in these derivative securities.  Secondly, when mortgage terms have to be restructured, it makes it difficult to get the approval of the mortgage owner when the mortgage itself has been sold and then sliced up into derivative securities.

Beyond the bailout help for the banks and financial institutions, a line formed, which included the domestic automakers, several states and a number of other industries hard hit by the economic slowdown.  The new administration will apparently have control over the remaining funds and will have the new Treasury Secretary distribute those funds as he sees fit.

It should be understood that the government is not just handing out funds without anything in return. While there is some dispute about the stipulations attached to the funds disbursed and the eventual use of the funds, the government is getting preferred stock and warrants in return. Could the government eventually make a profit on their loans?  Possibly.

In the seventies, the government loaned Chrysler Corporation funds to keep the automaker from going under.  The government eventually made a $660 million profit on their investment.  That will likely not be the case today with the Detroit automakers, but some of the loans to banks and financial institutions could prove to be a wise investment. The economy moves in cycles and many of these businesses have the potential to be profitable again.

The downside to this entire scenario is that it adds to our national deficit.  Unless all of the loans are paid back, and additional value is derived from the investments in the financial firms, our children could be bearing the brunt of our financial problems.  Whether or not the bailout was prudent is yet to be seen.

With unemployment projected to be near 10% later this year or next, the bailout will most likely have prevented even worse numbers from being a reality.  During the Great Depression, unemployment stood at 25%.  The bailout won’t make everything good again right away, but it has the potential to move the economy back in the right direction.  Recessions generally run from 14 to 16 months and the current one began in December 2007. While some experts foresee tough times through the end of 2010, the bailout may have kept that date from being two or three years later.

Hold onto your hats…………..better days are ahead.

Investing, the stock market, mortgages, financial news and government bailouts can all be perplexing topics. Considering Money will try to help you make sense of these subjects and more.

Come back often to learn about what’s going on in the world of money and investing. Check out our latest tip to make your money last longer and work harder. Take advantage of lessons from knowledgeable investment advisors who manage the finances of wealthy clients.