Make This Bad Market Work for You

According to the recent price of Cleveland Cliffs (CLF - commentary - Cramer's Take), one has to believe there will be no demand for steel in the world ever again. According to the current quote for Darling International (DAR - commentary - Cramer's Take), the whole concept of turning by-products into usable feed and chemical products is now obsolete. Looking at the drillers and refiners, it becomes clear that we will never need to search for or distill another gallon of fuel.

The problem is twofold. First is that Wall Street has done far too good a job in the last two decades of selling the myth of long-term returns and the benefits of diversification. Far too often when discussing those high annualized returns available from equities, we do not talk about periods like the 1930s or the 1970s, when returns were abysmal. For the last 10 years, anyone who bought into mantra of buying and holding a diversified portfolio of stocks is even -- if he or she is lucky. The efficient frontier has pretty much been exploded as well. It seems that everything is correlated.

The other, and larger problem, right now is fear. It is hard not to be scared when your house is worth less than you paid and your retirement just got pushed back 10 years by falling equity prices. This is the type of financial crisis that can create great wealth. However, if you move too early, it can destroy a good bit as well.

At the risk of being repetitive, some stocks are getting so cheap that you have to be a buyer. However, the lack of clarity as to the future structure of the markets and economy creates higher risks than I have ever seen. "Be small and be careful" is my mantra these days.

I believe that we will come out of this crisis at some point. I do not know when, and in spite of the forecasts on both sides of the argument, neither does anyone else. There are simply too many unknowable variables right now. I do believe that, as always, the American people will find a way to prosper. Provided, of course, that the government gets out of the way and allows the markets to work.

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At the time of publication, Melvin had no positions in stocks mentioned, although positions may change at any time.

Tim Melvin is a writer from Stevensville, Maryland, who spent 20 years a stockbroker, the last 15 as a Vice President of Investments with a regional firm in the Mid Atlantic area. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Melvin appreciates your feedback; click here to send him an email.