Sunday, March 4, 2012

Why I'm Not Worried About the Current State of the Market (from 8/9/11)

Here is a note I wrote on August 9th, 2011 after the markets took a dive when the credit rating of the US was downgraded. I'm just posting it here to get my old ramblings on the site before I start publishing new posts:

---


Hi guys and girls. First of all, let's be honest: we had this coming to us. Since the debt ceiling was implemented in 1917, it has been raised over 100 (yes, 100) times. 100 times. These times weren't all bad. Most of them were for good reason...our GDP was growing, hence it made sense to increase the amount of money we could borrow so that we could continue to grow our economy. Problems arose when our GDP began growing at a lesser rate than our national debt (and really our debt ceiling, since the standard procedure was simply to raise it when we came too close). Over time, our debt got a little bit closer to our GDP, until recently when someone finally looked back at the chart and said "Son of a ... ! We are only bringing in $5 a week and we're spending $6 a week and paying interest on that extra dollar! Quick! Raise taxes!"

Here's a good video that explains it in simple terms: http://dailybail.com/home/bankrupting-america-history-of-the-us-debt-ceiling.html

Blah blah blah, right? I know, you've all heard this 100 times. Here's why it matters: The majority of the people on this planet (in this country in particular) DON'T UNDERSTAND THIS CONCEPT. Because of this, they buy into what the media tells them and believe that the economy is going to tank. To protect themselves, they decide to liquidate stocks and non-cash securities because they believe that in a market where nothing is certain, cash is king. In a strange type of self-fulfilling prophecy, the media's obsession with the economy collapsing and their continued reporting of such actually DOES bring on a collapse in the stock market like we've seen over the last few days. Specifically today, the Dow Jones Industrial Average dropped over 634 points or 5.5% to close below 11,000 for the first time since November of 2009.

But, really, what's changed? Sure, Standard and Poor's downgraded the US credit rating...from AAA to AA+. This is the equivalent of your FICO score dropping from 850 to 825. Of course it's lower, but it's still a fantastic score and really, not a thing has changed because there are still people out there who have 500s and 600s and they're the only ones the bank REALLY doesn't want to lend money to. Fundamentally, nothing about the companies in the DJIA has changed a single bit. In fact, that's true about most of the broader markets. This, ladies and gentlemen, is called PANIC SELLING. It's something I've seen plenty of times and it is usually a fantastic opportunity to make money.

Let's use logic here, people: When the economy takes a dive into the sewage system, what's going to happen to peoples' spending habits? Well, until recently, they wouldn't have changed at all...that's why we're in this mess to begin with. Now, since the markets are falling like Granny on an icy doorstep, people who are sticking it out are poised to lose a lot of money. Those people will change their spending habits. They will buy fewer luxuries and an equal amount of or more necessities. Things like paper towels, toilet paper, underwear, toothpaste, food, beverages, utilities, gas - these are the things that people cannot avoid spending money on. The rest of the people will take their cash and either a) save it, which we don't care about for the purposes of the stock market, or b) spend it on things they don't need which are made by the rest of the companies in the stock market.

My point is that the market is not going anywhere. Companies are still making money, they still make great products, they still have strong management. Just because the credit rating of the US took a well-deserved hit doesn't mean it has to end in disaster. If people really want to use their money to their advantage, they should be investing it in CASH RICH companies that make CONSUMER STAPLES. Why? Well, because when the US can't pay its debt, debt becomes more expensive, and companies with a lot of cash can afford to grow their businesses without taking on additional debt. Secondly, consumer staples are just that - staples - and we NEED them to survive.

Personally, I'm not worried about this situation. Don't get me wrong...I've lost close to 15% of my portfolio in the last three weeks. But the panic selling is creating a lot of great bargains. After the market stabilizes over the next few days (obviously at much lower levels), those interested in getting involved in the market might do well to pick up some shares of some of the biggest, cash-heavy, proven companies out there that provide things that we need in order to survive (or at least lead reasonably comfortable lives): companies like WalMart, Home Depot, Lowes, Coca Cola, National Grid, light bulb manufacturers, utility/electricity companies, retail clothing chains, etc. In addition, now is a great time to look at startup and innovative (e.g. green energy) companies who have been hammered over the last few weeks but that have a solid business model, consistent earnings, and have released no bad news. Those types of companies are very likely to be undervalued in this type of market.

When all is said and done, take a look at the max term chart for the DJIA:

http://finance.yahoo.com/q/bc?s=^DJI&t=my&l=on&z=l&q=l&c=

This is but a small dip in the grand scheme of things. The likelihood of a crash to the bottom is very, very low, and most people would do much better to take advantage of all the cheap prices. Until the companies in my portfolio start releasing news stating that they're hemorrhaging money or growing less or spending more or losing efficiency, I maintain that they still have the same or better intrinsic value as the day I bought them, and the overall values have only increased due to the heavy reduction in prices.

"Today people who hold cash equivalents feel comfortable. They shouldn't. They have opted for a terrible long-term asset, one that pays virtually nothing and is certain to depreciate in value." - Warren Buffett

No comments:

Post a Comment