Speculating on the Future

Yesterday’s huge tumble in the stock market has spread fear far and wide among investors, your editor included. But focusing on the here and now isn’t the answer. This too shall pass, but not anytime soon.

What’s a strategic-minded investor to do? Nothing at the moment. If you haven’t been trimming back on risk in your portfolio, now’s not the time to start. Easy to say, tough to do. But investing isn’t easy and panic selling is never the answer. Yes, those are just words and it’s slim comfort when you look at your investments and see only red. But keep in mind that people like Warren Buffett, and institutions like Citigroup and J.P. Morgan have been buying while everyone else is selling. Why? Because they’re looking forward, several years down the road.

We’ll go out on a limb here and predict that the global economy will survive, and in a year or two it’ll be thriving once more. One reason is that there are multiple mechanisms in place to prevent collapse. No, the risk of a deep, systemic failure isn’t zero. And, yes, an asteroid could hit the Earth next week. But for those with a medium/long time horizons, the key question you want to ask yourself: What will you think three years from now looking back?

For the 20 or so years your editor has been writing and investing for his personal account there’s a recurring theme that gnaws: we didn’t take advantage of the calamity. The mind tells us to run when there’s danger, and ride with the crowd when skies are sunny. There’s some logic to that, but left unchecked it leads to mediocrity or worse over time. Remember, we’re a lot close to the resolution of the mess that started more than a year ago. True, the factors that brought us to this point have been decades in the making, but the markets have been reacting only since mid-2007. Again, it’s possible that the bear market will run for another year or two, but that seems unlikely. The central banks are now in open warfare in attacking the bears, throwing money every which way. Eventually, that money will find a home in the capital and commodity markets and prices will stabilize.

But not just yet. There’s still too much uncertainty about how deep the financial damage is for banks. And there’s the question of whether Congress will, or won’t pass a bailout package. And then there’s the bigger issue of how all this will affect the economy. A careful study of the numbers strongly suggests that we’re looking at a recession for the coming quarters.

Nonetheless, markets are forward-looking animals. We’re mildly optimistic that a bottom is near, although that’s just pure speculation. But if you’re sitting on large allocations of cash, it’s time to seriously look at the opportunities. Strategic-minded investors should be prepared to make selective purchases of asset classes now and over the next year. If you’re really risk-averse, you may want to wait a bit more.

There’s no rush to buy today, this minute, of course. For all we know, the markets could go down much further from here. But this much is clear: the prospective returns of asset classes look dramatically better today than they did a year ago, or even six months ago. The catch is that the payoff probably won’t show up for three to five years, maybe longer.

The global economy is now knee-deep in upchucking the excess it swallowed over the past 20 years. It’s ugly, it’s frightening, and it’s necessary to purge the system of the financial and economic toxins. The recovery process will be long and slow. But it’s just this kind of climate where opportunity reigns supreme.

In short, it’s time to think strategically about buying. Slowly, cautiously and with an eye on making a series of purchases over, say, the next 24 months. Pace yourself, but by all means think about what you want to buy to round out your portfolio, and at what valuation.

There are no easy answers to winning the money game, mostly because emotion gets in the way. But letting what may be the biggest opportunity in a generation pass you by is hardly a winning notion.

If you find it hard to act, try this: make a small, symbolic purchase in an asset class you’re underweight the next time prices dip sharply intraday. Why? To break the mindset of fear and inaction. The first purchase in times of crisis is the hardest. In fact, it’s worthwhile to extend that thinking by making a commitment to add to your strategic portfolio once a quarter or two times a year from here on out.

It all boils down to whether you can look forward or not. There are better days ahead. Surely you’ll want a stake in that future, if only modestly. As frightening as that may be now, the alternative if much worse, as everyone will realize a few years from now.

Originally published on September 30, 2008 at The Capital Spectator and reproduced here with the author’s permission.