Rags to Riches, 2 March 2009

Rags to Riches
Investing Advice for the Common Man and Woman

Kenneth M. Ragsdell, PhD
2 March 2009

The Market

Mr. Market is expressing his opinion of the recent efforts to save the banking system and “stimulate” the economy. AIG is getting another $30 billion from the US government on top of the $150 billion the company received last year. In a joint statement, the Treasury Department and Federal Reserve said the rescue is necessary given the systemic risk AIG continues to pose and the fragility of the market today. The Dow is down 299 points to 6763, a level not seen since April 25, 1997. The S&P 500 decreased today to 700, a drop of 34 points. Volatility (the VIX) is above 50 again at 52.65, an increase of 6.3 points. One day the market is up and the next it is down, but the trend is definitely DOWN! Remember that the DOW was at 14,000 just 18 months ago. Fear and uncertainty are the dominant emotions in the market today. Investors abhor uncertainty, and are extremely fearful. Many investors have simply given up, and withdrawn their money from the market. This irrational selling has forced the market even lower! What is a wise investor to do?

Mr. Buffett

Late last week Warren E. Buffett distributed his annual letter to shareholders. To his credit, he got right to the bad news. Berkshire Hathaway lost 9.6% of its book value in 2008! Berkshire Hathaway has lost money in only one previous year (2001), and has returned 20.3% compounded annual gain over the last 44 years, or an overall gain of 362,319% (S&P 500 – 4,276% during the same period)! Let me quote Mr. Buffett: “Amid this bad news, however, never forget that our country has faced far worse travails in the past… Without fail, however, we’ve overcome them. In face of these obstacles – and many others – the real standard of living for Americans improved nearly seven-fold during the 1900s, while the Dow Jones Industrials rose from 66 to 11,497.” “Though the path has not been smooth, our economic system has worked extraordinarily well over time. It has unleashed human potential as no other system has, and it will continue to do so. America’s best days lie ahead.” I cannot say it better!

Vivek Jikar

In his weekly market report, Vivek Jikar reports that the conference board’s consumer confidence index declined to 35 in February. Consumers are NOT confident, and are not spending or investing, but the good news is that more consumers are saving. Jikar observes that the market is stable and is going down, and gives recommendations for buying and selling short based on stock stability.

Advice

Many are saying that the sky is falling, and the world is about to end, but I suggest that Chicken Little (and you and I) will survive, so hang in there. Remember to buy low and sell high. There are many, many buying opportunities so pay attention and prosper! Next week I promise more on investing philosophy with specific advice on when and how to buy and sell.