Rags to Riches, 9 March 2009

Rags to Riches
Investing Advice for the Common Man and Woman

Kenneth M. Ragsdell, PhD
9 March 2009

The Market

Mr. Market continues to behave badly! The DOW was down 582+ points (8.12%) this past week to a Friday close of 6,597.15. During the week we had three down days and two up days. The VIX (a measure of the fluctuation in the market) was up 14.26% to 51.28.

This past week the Federal Reserve released the latest Beige Book, which gives an indication of current economic conditions. Wikipedia says “The Beige Book, more formally called the Summary of Commentary on Current Economic Conditions, is a report published by the Federal Reserve Board eight times a year. Each is a gathering of anecdotal information on current economic conditions by each Federal Reserve Bank in its district from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other." Most economists and investors see the Beige Book as an important indicator of the health of the economy. The Wall Street Journal made the following summary remarks in their review of the latest Beige Book report:

“The New York Fed reported that a contact monitoring the financial sector maintains that the industry is still far from hitting bottom.” As the failure of Lehman Brothers continues to work its way through the industry, and Citigroup stands on the precipice of being split up, there appears to be more pain to come.

At the larger institutions, a substantial number of job reductions in the pipeline have yet to show up in the payroll statistics, due to ongoing severance payouts, the beige book said. Moreover, year-end bonuses are seen falling 20%-30% from last year at some of the smaller, healthier firms but more substantially at the larger establishments.

The struggles of the labor market aren’t limited to the financial sector, as most Fed districts reported a general weakening of conditions. Job losses in the manufacturing sector were reported by contacts in the Cleveland, Richmond, Chicago, St. Louis, Minneapolis, Kansas City, and Dallas districts.

However, there were some growth areas, especially for skilled workers. Richmond noted that demand was strongest for workers providing professional and support services, workers with high-level technical skills, and workers proficient in computer software, the beige book said. Chicago noted employment growth in the education, government, and health-care fields. Cleveland also reported continued hiring in the health-care industries.”

Mr. Market is clearly bipolar, and is currently in a really bad mood!

Mr. Buffett

Warren Buffett appeared this evening on CNBC, and gave a practical and patient analysis of the current state of the economy and the current and future state of the market. Investors are fearful. Fear is very contagious. Investors are also confused. We are in a vicious negative cycle, with 600,000+ new unemployed in the past week. Mr. Buffett made it that he believed that the market will recover, as will the economy. He advised us to not try to time the bottom, but to buy good stocks and time will bring profit. He repeated that America’s best days lie ahead.

Vivek Jikar

In his weekly market report, Vivek Jikar reports “the U.S stocks posted the biggest weekly losses in last three months. The retailers continue to face declining sales due to difficult economic situation. The institutional investors have turned to buying more and more gold. The gold and silver futures rose for a second straight week a similar uptrend is seen in some other commodities like copper, wheat, and cotton. The crude oil prices went up due to increased buying by institutional investors and declining inventories. The major reason that motivated trading oil was declining dollar in the forex market last week. I think the big guys are trying to make some money with these fluctuations in the forex market. We will continue to watch if the oil goes up to 2008 levels to affect an individual investor’s portfolio.”

What Kind of Investor Are You?

Personality plays an important role in recognizing the kind of investor you are. You need to be honest about your tendencies. If you don’t know your Myers-Briggs Personality Type Indicator, I recommend that you go to www.humanmetrics.com/cgi-win/jtypes1.htm and take the test and record your personality code. Personality is an indication of how we perform under stress; not who we are! On the other hand it is important for you to understand your tendencies. Learning style is related to personality, but we will discuss this issue at a later time.

So, what kind of investor do you want to be? Be aware that this blog is for investors; not traders. Trading is really a fundamentally different business. Trading is fun and addictive – take it from me! If you are going to be (or are) an investor you need to decide not only your tendency, but more importantly what kind of investor you wish to be. Here are a few of the common types: income, value, growth, and aggressive growth. What do you think? Which of these investment types fits your personality?

Advice

With many stocks at or near all time lows, we need to think carefully about buying stocks with current prices which are well below intrinsic value and provide a reasonable margin of safety. You may wish to visit www.stock2own.com to examine stocks on your wish list. Stocks with good big six numbers offer the opportunity for future profit. Stocks that appear to have the potential to deliver 15% annual return for the next ten years, and are being offered by Mr. Market at less than half their intrinsic value should be seriously considered for addition to your portfolio.