Friday, September 2, 2011

Buy Good Stocks and Live a Long Time--Lessons Learned From Irene, the Debt Crisis, and TV

For reasons discussed in a series of emails (available upon request), Kristen and I left Aspen last Friday to fly directly into the teeth of Hurricane Irene where we were repeatedly assured by the news media we would face certain death. It was a case of choosing between staying alive, or missing her father's 70th birthday party, and Kristen made it pretty clear that life would not be worth living for me going forward if we missed the party (which was canceled as soon as we landed).

But I digress. This piece is about the stock market and lessons learned.

First let's talk about what we have learned about the news media in general and TV news in particular.
On a broad range of issues, it is clear that given their huge investment in 24-7 coverage, news media's top priority is no longer keeping us better informed. It is now about keeping all of us as frightened and/or angry as possible all the time. It is a lesson that they learned from politicians over the years. Going negative works if your goal is to attract attention.

Let's start with our widely reported debt crisis. Actually, the U.S. doesn't have a debt crisis. A debt crisis is when you owe a lot of money and can't get anyone to lend you any more. The U.S. owes a ton of money, but a whole variety of investors are lined up to loan us more at lower and lower rates. That is despite the threat of the Tea Party Congressmen to make the U.S. default on its debts and promises, the equally irresponsible decision of Obama to cave in to those tactics, and the subsequent downgrade of our credit rating. The net effect of all that was to cause buyers of our debt to loan us even more money at even lower rates.

What we do have is a structural problem, well known to millions of Americans from their personal lives, of spending way more money than we are taking in. That needs to be addressed by finding ways to take in more money and spend less. But the U.S. is not bankrupt by any definition nor are we out of money.
Yet the media treated it as an "end of days" scenario that would kill the stock market and life as we know it as well as causing our borrowing costs to immediately go through the roof.

Without missing a beat, the media obsession transitioned to the European debt crisis and the pending implosion of all their banks.

Then focus shifted to the Middle East and the Arab Spring. We were told that the overthrow of murderous dictators (and our longtime allies) like Mubarak and Assad and Qaddafi would destroy stability and oil supplies in that part of the world and it would kill the stock market and life as we know it. Apparently, the theory is that freedom and democracy are just too messy when they come too suddenly and we were better off when the thieving and vicious despots ran that part of the world.

Just when the Libya story was reaching a climax, reporting from the entire region stopped for a solid week as Hurricane Irene became the only story worth reporting. We were told that the entire eastern seaboard was going to be washed away and life as we know it would never be the same.

I know because I'm still here in Connecticut since all the flights were preemptively canceled for days to accommodate the end of the world which never happened—again.

Do you notice a trend here?

It seems as though whatever happens and wherever it happens in the world today, the story line is always the same. This is really scary and the end of life as we know it. You should be very afraid and sell all your stocks.

The other trend, again because of the desire to keep us glued to our TVs and computers nonstop, is to make investors believe that it is no longer a good idea to buy good companies and hold them for a long time. We are told that we have to be proactive and trading in and out of the markets constantly in order to protect ourselves. And, of course, watch the markets like a hawk every minute of the day to know what and when to buy and sell and buy and sell.

I couldn't disagree more in general and particularly right now.

It is true that our country and much of the world has behaved irresponsibly over the last decade. Spending needs to be cut and tax revenues need to be raised. It is true that high levels of unemployment and underemployment in the U.S. are a huge problem. It is true that the slash and burn ideology-driven political tone in Washington is making it difficult to enact constructive policies. It is true that there are financial crises in Europe and elsewhere that are very frightening. There are and have been real challenges that are worthy of concern.

Like my clients, I want to invest long-term money in assets that offer the best chance for preservation of buying power, future income, and capital appreciation.

But unlike most of the pundits and a lot of investors, I believe that buying gold at $1,900 an ounce and loaning money to the government for 10 years at 2 percent interest or putting it in the bank at zero percent interest is not the way to be safe and prudent.

Unlike CNBC (whose most popular shows are now called "Mad Money" and "Fast Money" (which should speak volumes about their priorities), I continue encourage investors NOT to be very proactive in their trading and check the value of their accounts six times a day (or six times an hour for some).

What is getting lost in the popular discussion is the fact that in the face of all that has happened during the last few years, hundreds of companies are now making record profits, sitting on record amounts of cash, have little debt, and are paying ever-rising dividends that are far higher than the returns available from "safe" alternatives.

Several of my clients contacted me over the last month and asked what I was doing to protect their accounts. I told them I was keeping them invested in what I believe to be profitable, high yielding and/or potentially fast growing companies that are projecting good earnings going forward and are benefiting from macro-world trends that are not changing. I honestly believe that those are not only the best places to be going forward, but are also the safest places to be if your goal is to maintain or grow your net worth and buying power during a period of unprecedented deficits and political dysfunction.

Yes, August was a terrible month for the stock market. Most averages dropped 15 percent or more during just a few weeks. It happens. On average, in normal times, the market suffers a 20 percent or greater correction once every two years.  When that occurs, it is not a "crash."  It is simply the market being the market.

And when that happens, it is generally an opportunity to pick up great companies at good valuations —not the last chance to get out before the end of the world and life as we know it.