Those of you not entirely consumed by the need for information about Britney's scalp and Anna Nicole's progeny may have noticed that last week the Dow Jones closed after a drop of 416 points. That wasn't good. Since then there has been some upward movement, but the tumble still stands as a notable event...
NOTE: The following is about economics. You've been warned.
The word for the day is "financial correction." We've been experiencing an upward surge, or bull market as of late. Well, not that late. Years, in fact. On 9/11 the Dow dropped 684 points. That's about it in the realm of drops in the percentage points range. But this one occurred because of our friendly new superpower, Uncle China. You may have seen him around, say on the label of every inexpensive product you have purchased this millennium. And what will we learn from this? Our economy is global, and our economy is fragile.
The US is a superpower, but we are controlled by financial markets. It is a capitalistic society. Yeah, I know, duh. But hear me out, and you can grow rich!!! The
stock market is controlled by people and, as a result, emotions. The
two most prominent of these are
1. Fear
2. Greed
Under their sway, the
market makes very little sense in the short term. On the slightest news
of a decline or the first glimmer of hope, the market can plummet or skyrocket far beyond the
ranges of reason and logic. Volatility.
Imagine, if you will, that there's a bookstore in Happytown that you wish to
purchase. The store sells $300,000 worth of books annually and is quite
profitable. This particular bookstore is painted a lovely shade of plaid.
Each morning, the investment banker representing the current owners
call you up and offers to sell you the property for what he
believes it is worth on that particular day.
On Monday, he comes and offers to sell you the business for $500,000. Hell, no, you say. On Tuesday, he stops by and
offers the store to you for $800,000 because he believe bookstores that
are painted plaid are on the rise. Once again, you send him packing.
On Wednesday, however, the banker arrives at your office in a panic.
Apparently, a number of students at a local high school began to burn
books en masse and he is gravely concerned the bookstore business will
soon have no value. As a result, he offers to sell you the business for
$50,000. Realizing that it is completely illogical to assume a book
burning is going to have any effect whatsoever on long-term profits,
you readily accept the deal and buy the company for a fraction of its
intrinsic value.
Well this irrational emotional stuff is featured just about every day. When a company's stock plummets, people
often panic and sell. Unless the business is truly facing extinction or
a drastic decrease in value, this is insane. If Cherry Garcia
went on sale, you wouldn't wait until it had doubled in price before you
bought it. Same with stocks. Coca-Cola
is certainly more attractive at $20 per share than it is at $50 per
share, regardless of any short term difficulties that may arise.
True fortunes are made during times of financial corrections. Only one year before he completed the
formation of U.S. Steel (which financial historians have called the
deal of the 20th century, not counting the Stryper records I scored on Ebay), J.P. Morgan said that such a feat could
never be accomplished by any man - until the markets crashed. The
depressed valuations of the companies involved allowed him to purchase
the business entities at a fraction of what they had been selling for
twelve months earlier. So what I'm saying is the next time the market is cut drastically to its knees, look around for the great, solid, blue chip companies
that have weathered depressions countless times before. The odds are
substantial they will be selling at discount prices, and when the
market finally does recover (which it inevitably will), your portfolio
will profit from the shrewd, logical investment decisions you made
while the investing public was in a panic. The secret to wealth has
always been to "buy when there's blood running in the street and sell
when everyone is pounding at your door, clawing to own your equities."
You hafta have enough faith in yourself to buy when the rest of the
market is selling. Most people don't have the self-confidence and
resolve to do so, and always end up following the crowd.
Remember, just because you follow the majority of people, doesn't mean
the majority of people aren't wrong. That's why 95% of investors aren't
driving Bentleys and living in Dubai three months out of the year.
Base your decisions on analysis and value and you will, more often than
not, come out ahead.
Now I know you're thinking, why the hell am I getting stock advice? Yeah, most of you don't own stock, but seriously, guys and gals, consider the investment. Don't blindly trust that the anonymous faces of 401K asset managers are blindly pursuing your interests. Pick up an issue of Business Week or The Economist to peruse during your next flight. It's empowering to familiarize yourself with knowledge that the moneyed class acquire as birthright.
Where was I? Ahh, yes. The market dropped in reaction to the Chinese market. So yes, EVERYTHING has to do with the price of rice in China. Like it or not, we are globally interconnected, and if we do not enter a dialogue involving trade, government polices, the strength of our dollar, consumer debt, etc., we will be blindsided by the next wave. Elections are upon us, and as those running for President of this once-great nation unveil their platforms, concentrate on what they have to say about foreign relations. Beyond the smooth talk and the slow-motion soft-focus emotional stories, what is their experience in international diplomacy? Who has an intimate understanding of the markets?
Oh, you know I got more to say about this, honey chile...
