Monday, October 6, 2008

do I or don't I? equities edition

These are the times when that one clever investor gets in for some ridiculously low price and in 5 years we hear that if we had invested 7 grand in some obscure stock we too could be raking in the millions. I really feel like I should be devoting more time to seriously looking at getting into the markets but (1) no one knows what's going on - hedge funds are down this week, what's next? and (2) I still got my wonderful school-work mindnumbing grind to tend to so I don't have much time to sit down and look into personal investing. But then, is there a better time? Why devote attention to school when you could be finding crazy arbitrage opportunities and then schooling your professors? One of my professors - in financial statement analysis - asked the class, very seriously, "Can you all fill me in on what I need to know about what's going on in the economy right now? I haven't been following it but I know it's serious." My group in the back row had to suppress our expressions of dismay - why, praytell, are you teaching this course if you don't understand how financial statement analysis is literally smack dab in the international limelight? I don't want to be that guy - so caught up in my daily grind that I miss some fabulous opportunity. That'd be like being Michael Dell's roommate who's just going to class and being a good student while Dell is meanwhile building a personal computer empire.

What incited this post was Jim Cramer's interview this morning on the TODAY show:

“Whatever money you may need for the next five years, please take it out of the stock market right now, this week. I do not believe that you should risk those assets in the stock market right now.”

While the animated Cramer is known for telling investors the best prospects for earning money on the stock market, he’s now saying retreat is the best position in the face of some of the worst financial news in decades. The bank lending default crisis that put financial firms around the country on the brink of collapse could bring “as much as a 20 percent decrease in the stock market,” Cramer predicted.

He called the U.S. government’s $700 billion bailout plan, which includes raising the insured rate on bank deposits from $100,000 to $250,000, as a “good one,” assuring bank depositors: “Your money is safe.”

But he warned that the same may not be true for stock market investors.

“I don’t care where stocks have been, I care where they’re going, and I don’t want people to get hurt in the market,” Cramer told Curry. “I’m worried about unemployment, I’m worried about purchases that you may need. I can’t have you at risk in the stock market.”

Still, those with the assets — and the stomach — to ride out the stock market’s ups and down over a five-year period might be best served by holding their nose and holding onto their stocks.

“I think what you have to do, if you can withstand it, is just ride it out,” Cramer said.

Very rarely does someone tell you to pull your money out of the stock market. It adds to volatility and the "I can just put it back in when the market turns around" theory doesn't usually take into account the transaction costs associated with hopping in and out the market. I talked to a classmate about possible action plans for people like us and people like our parents. For us it doesn't really matter, no one really knows if we're going into a recession or a depression and we can afford to experiment a bit with excess fundage - especially with no kids, no spouse, no mortgage, etc. Don't play more than you can afford to lose. However, for our parents it's much more complicated. 5 years to retirement? VERY tough call. Hopefully their retirement plan is diversified enough where the overall loss to the market is only affecting a smaller portion of the portfolio - when nearing retirement you don't want all of your funds in risky assets anyways. What if they do have too much money in equities? Is it time to pull out and take your L's? It's time to make an appointment with your financial planner. If your retirement is closer to a 10 year plan I think its safer to bet you should ride it out and avoid transaction costs, etc. But that's assuming the markets will rebound and I honestly feel like all bets are off in 2008. I was much younger during the last recession but I feel like, with the panic that we're seeing in the media, its safe to say this is unprecedented and we must tread carefully.

Last Friday the McCombs Business School hosted a Dean's Forum on the Financial Crisis. I only made it for the tail end because I still had class (again -- was it worth class to miss it? I was torn.). Luckily they taped the entire thing and posted it up HERE. This was a meeting of some of the most experienced, intelligent, and educated minds that McCombs has to offer and they offered incredibly vivid insight into the situation. This was a talk by business educators to budding business professionals. They referred to concepts we knew, they didn't sensationalize, and they countered hopeful statements with harsh realities. I was disappointed that more of my friends weren't in attendance, but luckily they've started coming to me asking me what exactly is going on and why they have to be worried anyway.

I know we're all busy and preoccupied with our own lives but do yourself a favor and go watch the video on the McCombs site. This is such a valuable opportunity: to get this discussion and decomposition of the situation geared towards intelligent young people, not the general public audience of the nightly news that hasn't been following as closely and just wants the hard and fast conclusion. This is a situation that doesn't lend itself well to a hard and fast conclusion.

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