Saturday, October 11, 2008
Did Main Street call a bottom?
Having flown westward across the Atlantic today, I had the time to read a good bit of this morning's Financial Times, including this interesting article describing the waxing and waning -- mostly waxing -- of the "panic" in the stock markets this week. This bit caught my eye:
The straw that broke Wall Street was a huge liquidation of mutual fund holdings by retail investors. By Wednesday, US investors had withdrawn $40bn from mutual funds in a week.
Traders said the pace of liquidations accelerated on Thursday and heavy redemptions and margin calls for active investors such as hedge funds prompted a 5.5 per cent plunge for the S&P in the last hour of trading.
“We saw a lot of redemptions and margin calls between three and four o’clock [on Thursday],” said Anthony Conroy, head of trading at BNYConvergEx.
I respectfully suggest that this is not the right time to be selling your stocks. There are at least three reasons for this.
First, it is unwise for you personally. Do not sell after weeks of calamitous price declines. Sure, stocks could and almost certainly will fall further, but they will not go to zero, and they may well be nearing a bottom. By some measures of value stocks are cheaper today than they have been in more than twenty years, or fifty. It is almost certainly a bad idea to sell now, as opposed, for example, to last month. And if you sell now you may miss the biggest part of the next move up, whether that happens next week, next month, next year, or next decade.
Second, following the crowd is rarely smart. If you buy when most people are buying and sell when they are selling you end up losing money in both directions. If you bought your house during the bubble and can no longer afford the mortgage you should already have learned this lesson.
Third, contrarian investors will view the fact that Main Street is selling in a panic to be bullish. Look for the big money to jump in at the first sign that mutual fund redemptions are peaking.
Come to think of it, if you are going to redeem your mutual funds, never mind all the stuff I just wrote and get on with it already. Your redemption might well be the one that attracts the contrarian investor who will trade the bottom of this hideous market.
2 Comments:
By 
smitty1e, at
Sat Oct 11, 10:13:00 PM:
The bottom has to be timed for maximum shock effect WRT the election.
What's all this going to do for the cash flow at the federal ponzi schemes, one wonders...
By 
, at
Sun Oct 12, 01:37:00 PM:
Just for kicks, I bought a little tiny bit in the friday afternoon rally.
