- The past five days have been the third-worst five-day period since 1932. (Side note: The biggest year ever for the Dow was 1933, when it went up 100% in the middle of the Great Depression.) People think now that we are heading for a depression, but nothing could be further from the truth. If there is no depression, then the market is cheap, even discounting earnings 20%-40%.
- The arguing over the bailout bill has been borderline insane. One media pundit said it was the kind of government intervention that caused the Great Depression of the 1930s. Again, nothing could be further from the truth. The Great Depression was caused by three things: increased tariffs, rising interest rates (i.e., the government was contracting the economy to avoid the speculation on stocks that led to the 1929 crash) and wage freezes. The government is doing the exact opposite here. Flooding the economy with trillions of dollars in cash -- trillions. That money will work its way through the banking system and will eventually inflate asset prices: commodities, stocks, houses, gold, etc. It's a tsunami of cash that will overwhelm anyone trying to dam it.
- The single biggest reason the stock market has fallen in the past five days is hedge fund liquidations. Of the top 20 hedge funds in the world, something like 18 are down 20% or more this year. They are getting redemptions, they are liquidating, they are selling stocks with reckless abandon to raise cash. Our job as good investors is to give them liquidity and take their bargain-basement merchandise off of their hands. Let's get their selling over with so we can make money.
- "But it's not a bottom yet." You will never call a bottom. Ever. In your life. But by the time the bottom has been "confirmed" (a hateful word used by technical analysts), the S&P will be 200 points higher and the fast money will be gone. The key is always to use no more than 1% of your portfolio per trade, hedge if you must (by selling short the SPDR Trust (SPY) ETF against your positions) and buy every increment down.
- A lot of people are saying, "Don't trust Warren Buffett, he didn't buy stock." This is true. He bought debt and warrants on Goldman Sachs (GS) and GE (GE), and those warrants can convert into common stock at some later point. But Buffett is in this to make an enormous amount of money. He'll only do that if the stocks go higher. He used a very similar structure on Gillette in 1989, and it was one of his most successful investments ever. Ditto for his investment in tech company Level 3 (LVLT) early this decade.
- Every record has been broken, every systematic trading method has flown the coop. But that doesn't mean sentiment can be completely ignored. When everyone in the media is telling you to sell stocks, and the market itself is 35% down in the last 12 months, you have to begin by asking, "Why didn't they tell me to sell 5,000 points ago on the Dow?" Who now is left to sell?
Ever wish you had a chance to meet Jim Cramer, James "Rev Shark" DePorre and Vince Farrell? What would you ask them about their investing strategies or aligning your portfolio for 2009? You'll get your chance at a TSC conference on Oct. 25, in New York City. Please click here to email us for more information.