Stock Market News for November 2001

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Wolf of a Different Color
Remember that by-gone era of euphoria in the financial markets? It wasn’t so long ago. March 2000 to be exact. The masses of Wall Street stock analysts, fresh off of irrationally good performance in 1999, were tripping over themselves to tout the seemingly unending profit growth of their favorite companies. It seemed the party would never end.

Oh boy, were they wrong. Not only did they incorrectly predict phenomenal growth, but they also failed to see the coming contraction in the economy. How could they have been so misguided? After all, these are America’s best and brightest, very smart individuals, who possess all kinds of advanced degrees from leading universities. Well, they badly missed it for a very simple reason. They forgot about the fundamentals. It’s the same reason a multimillion dollar running back fumbles the football. He simply forgets to hang on! It’s the same reason a star second baseman commits an error. He simply forgets to look the ball into his glove!

The main difference, the thing that makes it so difficult to comprehend, is the collective nature of this snafu. We can understand when one individual makes a bad call. But when the entire Street gets it wrong, we have to wonder.

Why then do we now embrace the wisdom of these same perpetrators? Investors have been selling stocks aggressively during the past year, culminating in the final two weeks of September following the terrorist attack. The driving force behind the selling frenzy was the pessimism coming from Wall Street analysts. The masses are now predicting doom and gloom. The first time the analysts are wrong, shame on them. The second time, shame on us.

Why should we react to anything they say? They were shouting, “Buy! Buy!” right at the top of the market in 2000. Now, they are equally vigorous in screaming, “Sell! Sell!” right at what could be the bottom of the market here in 2001. They are crying wolf, again. Yes, it is a wolf of a different color, but still a wolf.

So, now that we recognize the folly in listening to the very same group that lead us off the cliff in 2000, what should be the next step? First, we should stop responding to every word from the Street. When the boy cries wolf one too many times, we tune him out. Second, we should return to what we were doing before the boy cried wolf. Investors should go back to their core values. They should ask why they were investing in the first place, and review risk tolerance and objectives. During the 1999-2000 explosive run-up in the market, many investors strayed from their core values.

Investors will do well to learn from the experience of the past year. It’s easy to believe the good news when it squares with a rising market and it’s also easy to believe the bad news when the market is tanking. Resist the temptation. The money lost in the market during the past year will be in vain if investors do not learn that things are never as good or as bad as the experts say. Have you ever seen the media parade a group of experts across the T.V. screen where they were each saying, “Gee, I think the world will be kind of average during the next year”? What we typically see are experts saying, “This market is headed for the moon” or “get ready, this market is going to zero.” It grabs attention. It sells advertising. Investors want someone to have an opinion they can latch onto.

Try something new on for size. Get with a professional advisor and develop a long-term investment plan, one guided by your values. Decide what risks you are willing to shoulder: loss of principal, inflation, or taxes. Determine what you want your investments to provide in terms of growth and income. Then, after you set your plan in motion, stop worrying about what the analysts are saying about this week or next quarter.

Do yourself a favor and visit your local library. Find the newspaper headlines from 1974 toward the tail end of that damaging bear market. It will amaze you how gloomy all of the experts were back then, just before the market turned up and went on a 60% rally. Admittedly, the world is different now. Back in 1974, we lived free from the specter of terrorism. Sadly, today terrorism is a threat to our financial markets. But investing has not changed. Staying the course is still the correct decision for investors.

October, although rocky, did show a substantial rebound from the dismal September lows. Investors who work under a disciplined approach are using the current weakness to add high quality companies to their portfolios. Note, though, the word “quality.” Some investors are continuing to make the mistake of investing in a reactionary, haphazard way. They are buying the same low quality companies simply because they look “cheap” now. There is good reason some companies are cheap. Just because your favorite technology company is down 95% from its high doesn’t mean it is worth buying.

We’re in for several quarters of GDP contraction, but moving forward from there, we find no evidence to suggest that our economy will not return to prosperity. Thus, since the stock market reflects events six to nine months into the future, now is the time to catch the wave.


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