Summon Your Courage and Buy Stocks
During the Great Depression, an entire generation became convinced that owning stocks was dangerous. But if you were among the courageous few who bought and held stocks during and after the Depression, you earned spectacular returns.
Depression-level stock phobia might be making a comeback. Will you suffer from it or conquer it?
This past Monday, a team of researchers conducted an online survey of nearly 600 people nationwide. The results constitute a unique real-time recording of what was running through people's minds from 1 p.m. to 5 p.m. Eastern time on the day the Dow was shedding nearly 778 points in a ragged panic.
First and foremost, Americans are afraid.
Asked whether 'the financial challenges the country is facing now pose a greater threat to the quality of my life' than major natural disasters, 87% agreed; 83% were more worried about the financial crisis than a terrorist attack.
Psychologist Paul Slovic of the University of Oregon, who led the study, had investors estimate the performance of their stocks and stock funds over the next 12 months and the decade to come. When Dr. Slovic last asked this question, in early 2001, only 6.7% of investors expected a zero or negative return during the coming year and a mere 1.3% thought they would have no gains over the next 10 years. This past Monday, however, 36% foresaw no profits in the next 12 months and fully 5% predicted that their portfolios would go absolutely nowhere for a decade.
Investors seem riveted by what is happening, as if they were the witnesses to a fatal accident unspooling in slow motion before their eyes.
The closeness with which Americans say they have tracked events 'is really kind of astounding,' says Dr. Slovic's collaborator at the University of Oregon, psychologist Ellen Peters. Asked how long they had watched the financial news on television each day in the past week, 74% said at least one hour and 15% said four hours or more.
In short, investors' view of the decade to come is being shaped by the events of the last few days. Peering into the future, all they can see is the immediate past, which is full of anger, pain and distrust. As finance professor Meir Statman of Santa Clara University says, 'Fear increases pessimism.'
Add it all up, and it is hard not to be bullish. As an intelligent investor, you must always ask: What is my edge? What information or skill do I possess that the people on the other side of the trade don't? In normal times, that is a high hurdle. Today, however, you need only two things in order to have an automatic edge: cash and courage.
This past Thursday, Columbia Business School held a conference on value investing to commemorate the publication of the revised edition of Benjamin Graham's classic volume, 'Security Analysis.' Seth Klarman of Baupost Group in Boston is an editor of the book and one of the leading value investors in the country.
'Normally, as a buyer you have to compete with a lot of very, very smart competitors,' said Mr. Klarman. 'But many of the smartest people are on the sidelines now because of redemptions, margin calls or panicked-out-of-their-mind selling. So you don't have to be as smart as you did before. You just have to be in the game.'
The day Mr. Klarman spoke, the Dow fell an additional 348 points, and 658 stocks, or more than 15% of the total, hit new 52-week lows on the New York Stock Exchange. Yet the word Mr. Klarman and several other speakers kept using was 'excited.'
That is because investments everywhere are priced as if the whole solar system were going out of business. U.S. stocks have lost 24% since Jan. 1; foreign stocks are off 32%; emerging markets, nearly 40%; junk bonds are down 13%; even municipal bonds have fallen almost 10%. Money is pouring into U.S. Treasury debt -- so much so that stocks now offer more income than bonds do. The dividend yield on the Dow Jones Industrial Average is currently at 3.14%, higher than the 2.68% yield on the five-year Treasury note.
With so many professional money managers afraid to act, with most of the public in the grip of fear and anger, you should put your cash and your courage to work. If you have no cash, use your courage: Rebalance by selling a little of anything that's gone up and buying more of whatever's gone down.
If you have both cash and courage, make a list of 10 stocks you've always wanted to own at 'the right price.' Chances are, they are cheap. Better yet, think of an investment category you've long wanted to venture into, like emerging markets. Chances are, it is on sale. Just about everything is.
JASON ZWEIG |
|
