Patriotism Proves a Poor Investment Guide

SAN FRANCISCO -- Just about anyone who bought stocks at the reopening of trading Monday is now sitting on losing positions, which may be patriotic, but isn't sound investing.

The Market

Dow Suffers Worst Point Loss as Market Somberly Reopens

Rate Cut a Small Bump on Market's Downhill Ride

Cramer: Surveying a Crestfallen Market

Calculating Potential Scenarios for the Dow

The Economy

Patriotism Proves a Poor Investment Guide

Tracking the Trendy Jobless Rate

Cramer: Five Bullish Wild Cards

Sector Watch

Airline Stocks Are Falling. What Next?

Some Security Companies Fly in Face of Selloff

Online Travel: Stocks Plunge, Wiping Out Much of 2001 Gains

Defense Equipment Firms, Security Specialists See Big Gains

The Networkers: Cisco Recovers but Buyers Remain Scarce

The Outlook for Biotech Stocks

The notion that investors should buy stocks for patriotic reasons was one of the most vexing aspects of the emotional resumption of trading Monday. One particularly cynical hedge fund manager wondered whether the top executives of the many firms that have announced corporate buybacks are simultaneously planning to buy with their own money.

A number of sources expressed concern that the industry may be viewed as callously using the Sept. 11 tragedy to dupe individual investors into buying for nationalistic reasons, while institutional investors are taking a more rational approach. Many Wall Street firms took a one-day hiatus from downgrading stocks Monday and there's an unwritten rule among traders not to profit from others' misery. Still, one wonders how long that gentlemen's agreement can last. Meanwhile, major strategists including Abby Cohen of Goldman Sachs, Douglas Cliggott of J.P. Morgan, Thomas McManus of Banc of America Securities and Ed Yardeni of Deutsche Banc Alex. Brown cut their earning estimates and/or price targets for the S&P 500 on Monday.

"All of this talk about investing for America and to show the terrorists off is very, very dangerous," Aaron Edelheit, president of Sabre Value Management in Boca Raton, Fla., said via email. "Investing should never be based on emotion [and] there is no such thing" as patriotic investing, other than, perhaps, investing in Treasury securities or war bonds.

Note, Edelheit is no raving bear. His (admittedly) small $5 million fund was up 19% year to date, and net long heading into this week. Monday, he bought some stocks hardest hit in the selloff, including J.C. Penney (JCP Quote), AMR (AMR Quote), Southwest Airlines (LUV Quote) and Continental Airlines (CAL Quote).

The point is he bought them because he believed them to be cheap, and because of the potential for government assistance in the case of the airlines. Not out of any sense of duty to country.

Speaking of duty, Ike Iossif, president of Aegean Capital Group in Chino Hills, Calif., observed that individuals encouraged to invest for patriotic reasons "have not been told there are lots of foreigners who have poured billions into the U.S. market who have a fiduciary responsibility" to prudently invest clients' assets, not to rally around our flag. Money managers here have a similar responsibility, which is binding by law.

Rather than urge clients to invest for emotional reasons, the fund manager said the industry should "step back for a second and inform the individual investor of the risks that currently exist."

Iossif, whose firm manages about $25 million, believes the risks have increased markedly from a week ago, when, in his estimation, economic fundamentals were already deteriorating.

Economically speaking, the Fed's easing/liquidity injection and Congress' approval of a $40 billion emergency spending bill are "more than sufficient to overcome what has happened up to now," he said. "My fear is this is not the end of it."

One reason Iossif came to my attention is that he's one of the few market watchers to have warned about possible terrorist activity against America.

"The continuous violence [in the Middle East] -- if unchecked -- will ultimately impact our financial markets, directly, or, indirectly," he wrote on April 6. "It does not matter whether the escalating violence results in a wider conflict in the area, or Islamic extremists bring the conflict to our shores. Either way, we will still be drawn into it with grave consequences." ...