Blood in the Streets

Fear has reached epic proportions. I follow market sentiment closely and have for the past 11 years, and I've done historical research for the data available before that. This is the greatest acute panic in the market since 1987, certainly far above what I've ever seen personally. Edit: It greatly exceeds the fear present during the bear market bottom of 2002, 9/11, the LTCM bailout of 1998, and the "Asian flu" of 1997.

Anecdotally, nobody wants to touch stocks. On various message boards I frequent, there are innumerable warnings to wait till the market "stabilizes" before buying, and nobody is recommending buying now. Jim Cramer recommended pulling out all money you might need over the next five years on the Today show this morning. 6 in 10 Americans think a depression is likely.

Many people do what's called "dollar cost averaging": dumping money into stocks at regular intervals. If we label these "dumb buys" because they do not take economic analysis or market conditions into account, buying now would certainly be a "smart buy". There is far, far greater probability of higher than market returns if one buys today than from any prior dumb buy, or when the market was at all time highs less than a year ago.

There's blood in the streets. It's time to accumulate. Far-above historical returns await the brave.

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Yes, the expectation is

Yes, the expectation is higher market return, but it is also much higher risk. It's not obvious at all that the above normal expectation of market return compensates for the higher risk. That and I don't have enough money to make an investment relevant.

It's not only about the risk premium though, there's a liquidity premium. People want cash now, so if you have cash, you'll make good money selling it. It's like selling gasoline after a hurricane.

Falling knife

Don't catch the falling knife. It will chop your fingers off.

My favorite hobby

Catching falling knives is my favorite hobby.

I've done my share

It hurts.

Do you really want to buy now or after it falls another 20% off the high? Which would be 30% down from here. Don't you really want to be buying several years into the recession?

Seriously though, at this

Seriously though, at this point people are scrambling for cash, if you don't have equities you should get some.

Some day

I am planning on switching to equities about a year into the recession. I jumped in too soon on the last drop after 9/11. I only let things go down half of what I should have before jumping in. I am currently holding lots of cash in my 401k. Unfortunately my only choices are a money market, bonds, or stocks.

The day of 9/11 I was thinking of buying and dumping at the end of the week, but I was trapped in Japan at the time on a business trip and was afraid I wasn't going to be able to get out in time.

That drop two weeks ago was tempting also. I would have tried to get out the next suckers rally. However I was afraid I'd miss the suckers rally and end up still holding today. Good thing I didn't.

I'm thinking it's best not to assume at this point I can find a sucker in time to save me from the fall. I really do think the government has massively screwed up the economy. All the numbers from commodities prices, housing prices, trade deficit, savings rate, foreign cash and bond holdings, etc. point to that. We need a serious correction to get back on track.

I'm not sure that they can blow another bubble without people catching on in a serious way that the dollar should be toilet paper.

Doing the exact opposite of

Doing the exact opposite of whatever Cramer recommends might be a decent strategy for a hedge fund.

So...

Jim Cramer recommended pulling out all money you might need over the next five years on the Today show this morning. 6 in 10 Americans think a depression is likely.

Many people do what's called "dollar cost averaging": dumping money into stocks at regular intervals.

To summarize for Wilde: Pulling out, bad. Rhythm method, good.

Both risky

Both methods expose you to significant financial risk.

Just in case

To avoid misunderstanding, that was a paternity joke.

Actually...

...dollar-cost averaging doesn't make much sense to me. The alternative is "lump sum investing" which, as done by most investors, also results in "dumb buys". I suppose DCA lets one sleep at night easier, but the returns aren't any better, nor is the risk any less.

A better metaphor for my views might be:

Pulling out (now): bad
Rhythm method: bad
Trying to bang the ugliest girl in the bar: good

If no one bangs the girl in

If no one bangs the girl in the bar, it could be because she has HIV.
DCA is better than lump sum investing if the market mean has mean reversion, worse if it is trending (all else equal). The evidence is in favor of trending, therefore DCA is slightly worse.

Or...

You can drink the economic Kool-Aid being served by Washington and just go off and fuck everybody!

I Wish..

You were running for office and I could twist this stuff around for headlines...

"Widle's Economic Plan: Impregnate Unattractive Women"

Halloween Decorations

"Widle's Economic Plan: Impregnate Unattractive Women"

... and sell the babies as halloween decorations?

You have to make it sound like a plausible way to make money.

There is Only One Kind of "Smart Money"

Are the companies buying back their own shares? Are private equity & LBO investors on a shopping spree?

All else is flotsam.

KipEsquire, A Stitch in Haste

During the tech bubble,

During the tech bubble, founders were encouraged by their large investors to buy back their own shares. Many people would monitor insider buying and act on this. This signal has been gamed for a long time.

We've detailed Harvard's

We've detailed Harvard's Endowment's struggles in recent months. New expectations are the reported 20+% decline was highly optimistic. Looking at Harvard Endowment's historical returns, we can guess why the deflationary environment we've experienced would cause the portfolio so much pain. Harvard's endowment has become increasingly reliant on capital gains vs. income over the past 20 years, with income returns accounting for less than 2% of total returns in 7 of the past 8 years. In an environment characterized by asset deflation and equity market collapse (i.e. the past 6 months), capital gains get crushed.