Archive for the 'Mutual Funds' Category

Burton Malkiel — Keep Your Money In the Market

Kurt Brouwer October 13th, 2008

Burton Malkiel is well-known for his classic investment book, A Random Wall Down Wall Street (W.W. Norton 2007).  He is also a professor of economics at Princeton University.  In this piece, he points to some solid long-term advice on what to do during stock market panics — don’t panic [emphasis added]:

Keep Your Money in the Market (Wall Street Journal, October 13, 2008, Burton G. Malkiel)


…But just because stock markets have panicked, investors should not. The best position for investors today is not “fetal and 100% in cash.” We are not going to have a depression, and we have survived financial crises before. A century of investing experience, as well as insights from the field of behavioral finance, suggest that investors who bail out of equities during times like these are almost always making the wrong decision.

…Nervous investors convince themselves that every “light at the end of the tunnel” is a train coming in the opposite direction. Panic is just as infectious as blind optimism. During the third quarter of 2002, which turned out to be the bottom of a punishing bear market, investors redeemed their mutual funds in droves. My own calculations show that in the aggregate, investors who moved money in and out of equity mutual-funds underperformed the buy-and-hold investors by almost three percentage points per year during the 1995-2007 period.

Look at history: The market eventually bounded back from the damaging stagflation of the 1970s and the savings-and-loan crisis of the early 1990s, when a whole industry had to be rescued. Stocks also recovered from the Asian crisis of the late 1990s. Similarly, investors who held on after the more than 20% one-day stock-market decline in 1987 were eventually well rewarded.

So what should investors do? By all means, young 401(k) investors, and those in their prime earnings years, who are stashing away funds from every monthly paycheck, should stay the course. If you decide to eschew equities during periods of ubiquitous pessimism, you will lose all of the advantage of “dollar cost” averaging (buying more shares when prices are low than when they are high). Asset allocations should be shifted to safer securities over time as the investor ages, but only gradually and on a set schedule as through a “target maturity fund.”

If you are now approaching retirement and failed to move to a more conservative asset allocation, you should not do so now in response to a time of panic. If anything, well diversified investors should, at the end of each year, consider rebalancing to ensure that your portfolio composition remains consistent with the risk level appropriate for your financial circumstances and tolerance for risk. But this is likely to mean shifting into equities and not out of them.

…No one has consistently made money by selling America short, and I am confident the same lesson is true today.

When stocks are tumbling it is difficult to hold on or even add more to your portfolio.  Yet, we know that during downturns such as this one, we get great buys on high quality companies.  This environment is unusual in that real estate is falling too and even bonds are down.  If you don’t want to buy stocks, then the bond market has very attractive offerings now.  And, savvy investors can look to fallen real estate as well.  So, it is a target rich environment for the patient long-term investor.

The Worst Week in History for the Dow Jones Industrial Average

Kurt Brouwer October 10th, 2008

That’s not a headline I wanted to read.  The Dow Jones Industrials Average dates back 112 years and we just experienced the worst single-week performance in that history.  MSN Money has the story, which is sure to get plenty of attention over the weekend [emphasis in the original]:

Despite rebound, stocks end worst week ever (MSN Money, October 10, 2008, Charley Blaine & Elizabeth Strott)

The stock market finished its worst week ever with a dramatic rebound from even worse lows.

The Dow Jones industrials moved more than 1,000 points during the session — from a low of nearly 700 points to a gain of more than 300 — before falling back again. It was the first 1,000-point swing for the blue-chip index.

The blue chips closed down 128 points, or 1.5%, to 8,451. Twice during the day, the index fell under 8,000 for the first time since April 2003. Twice it bounced back.

The Standard & Poor’s 500 fell 11 points, or 1.2%, to 899. But the Nasdaq Composite Index gained 4 points, or 0.3%, to 1,650. A big engine in the Nasdaq’s gain: a 9.1% gain to $96.80 in Apple (AAPL, news, msgs). The iPod maker had fallen as low as $85 at the open.

For the week, the Dow and S&P 500 were off 18.2%. It was the worst week for the Dow in its 112-year history and the worst week for the S&P 500 since the week of May 21, 1933. The Nasdaq’s 15.3% loss was its worst since the week of April 10, 2000, as the dot-com bust broke…

So, for the Dow we had the worst week ever.  For the S&P 500, we had the worst week since 1933 and the depths of the Great Depression.  What a week.

State of California May Need Federal Cash

Kurt Brouwer October 3rd, 2008

The routine operation of short-term credit for corporations has slowed considerably.  Now, we see that the same is true for states.  Normally, states sell various forms of tax-exempt securities — both short-term and long-term — in order to fund their operations.  Unfortunately, the market for these securities has dried up and the states are running short on cash.

This would be the equivalent of looking in your wallet, finding you have no money and then realizing the ATM system at your bank is down.  Uh oh.

It’s a temporary problem, but certainly a serious one because the cash is needed to pay employees, creditors and even interest on debt. This LA Times piece has more [emphasis added]:

Schwarzenegger To U.S.: State May Need $7 Billion Loan (Los Angeles Times, October 3, 2008, Marc Lifsher and Evan Halper)

California Gov. Arnold Schwarzenegger, alarmed by the ongoing national financial crisis, warned Treasury Secretary Henry M. Paulson on Thursday that the state might need an emergency loan of as much as $7 billion from the federal government within weeks.

The warning comes as California is close to running out of cash to fund day-to-day government operations and is unable to access routine short-term loans that it typically relies on to remain solvent.

The state of California is the biggest of several governments nationwide that are being locked out of the bond market by the global credit crunch. If the state is unable to access the cash, administration officials say, payments to schools and other government entities could quickly be suspended and state employees could be laid off.

Plans by several state and local governments to borrow in recent days have been upended by the credit freeze. New Mexico was forced to put off a $500-million bond sale, Massachusetts had to pull the plug halfway into a $400-million offering, and Maine is considering canceling road projects that were to be funded with bonds.

…”Absent a clear resolution to this financial crisis,” Schwarzenegger wrote in a letter Thursday evening e-mailed to Paulson, “California and other states may be unable to obtain the necessary level of financing to maintain government operations and may be forced to turn to the federal treasury for short-term financing.”

…It’s customary for California to borrow billions of dollars at the start of the fiscal year to fill its coffers until the usual flood of sales tax receipts comes in after Christmas and income tax receipts arrive in the spring.

…Asking the federal government for a loan “is one option on the table,” said Tom Dresslar, a spokesman for Lockyer. The treasurer, he added, is working with outside financial advisors on a possible emergency plan to sell short-term debt notes to the U.S. government. Lockyer believes that such a plan is both feasible and legal, Dresslar said.

“I don’t think we have ever gone to the feds,” said Fred Silva, senior fiscal policy advisor with California Forward, a state budget think tank.

Silva said the closest California came may have been in the days after the 1994 Northridge earthquake, when at the request of the state, Washington sped up payment of federal funds that the state was owed.

State officials now fear they face a potential cash crisis worse than California confronted in 2003, in the final days of Schwarzenegger’s predecessor, Gov. Gray Davis.

At that time, the precipitous decline of state revenue in the middle of a budget year forced officials to pay a syndicate of banks a premium of hundreds of millions of dollars for what amounted to an expensive “payday loan.”

Even that option, administration officials say, would not be available during the current credit drought. They say if Congress does not approve a bailout plan — and maybe even if it does — there will be no lenders available to provide the state with the money it needs, regardless of the premium the state is willing to pay.

“We need to go as wide as possible to try to find buyers at reasonable rates,” said Robert Fayer [KB: should be Feyer], an attorney advising the state on its planned $7-billion bond sale.

“Whether it could ultimately be the federal government, I have no idea. It is a fairly radical concept.”

Nice to see Bob Feyer quoted in this piece even if they did not spell his name correctly.  Bob is a partner at Orrick Herrington in San Francisco and an expert on municipal finance.

This is one iteration on a theme we have seen happening recently.  The credit markets are just not functioning and this is beginning to impact entities at all levels.  I think many corporations and even some states have relied too much on short-term funding, largely because it was cheaper.  This crisis may change that, but in the meantime we have to get through this mess.

Is Washington Mutual Going Under?

Kurt Brouwer September 25th, 2008

Update:  Yesterday, we had a post questioning the long-term viability of Washington Mutual or WAMU.  Well, we now know that WAMU did go under and immediately thereafter the Feds sold the firm’s assets to J.P. Morgan/Chase for a payment of $1.9 billion. J.P. Morgan/Chase immediately did two things.  First, it wrote off WAMU’s mortgage holdings by $31 billion on roughly $176 billion of assets.  It then raised $10 billion in additional capital by selling shares.

I have to say that the Feds handled this collapse very well.  They allowed the private markets to operate and then, when that did not work, they stepped in and closed the firm.  Obviously, they had an agreement with J.P. Morgan/Chase ready to go.  It appears that no depositors will lose anything, whether they were under the FDIC insurance limits or not.  Also, employees will be retained by the new owner.

Shareholders have taken the hit and it was hard.  The last trade I saw was at 16 cents.  In March, J.P. Morgan/Chase offered $4 a share for WAMU, but the company turned it down.  No doubt they now wish they had taken it.

Original Post

The bank we know as WAMU, that is Washington Mutual, may be going under.  Two credit ratings agencies recently downgraded the company to a rating that is well below investment grade, that is, junk.

I think most industry observers have been expecting a deal in which another bank would buy WAMU.  And, there have been banks — J.P. Morgan/Chase and Wells Fargo — that were reputedly trying to put together a deal, but so far nothing has materialized.  It has been reported that WAMU is also looking for an infusion of capital from private equity firms, but those deals have not come through either. Unfortunately, time may be running and if a deal does not happen soon, it may be too late for WAMU.

As of June 30, 2008, assets at WAMU were about $310 billion as shown at this SEC link.  Given all the bad news lately, I suspect that total assets may have gone down quite a bit, but, if WAMU goes under, it would still be the biggest bank failure in U.S. history.  This year, bank failures have been modest, with the exception of IndyMac Bank, but a failure of WAMU would change all of that.

Via Calculated Risk

Our Thoughts On Financial Market Volatility

Kurt Brouwer September 25th, 2008


We have been through many ups and downs in the economy and markets over the past 25 years and we have found that two things remain constant:

  • The financial markets always have and always will fluctuate.  And really, we mean all markets, whether in stocks, bonds, real estate, gold, collectibles-you name it.
  • The financial markets recover and move on.  At times, the rough patch can extend quite a long time, but ultimately we believe the global economy is growing, and carefully-selected investments will do well despite temporary setbacks.

During these volatile conditions, we believe it is necessary to maintain a systematic and disciplined investment strategy and we believe that patience will be rewarded when the stock market rebounds.

Investing and Emotion:

One mistake investors frequently make is getting too caught up in current conditions - regardless of whether they are good conditions or bad ones. Do you get excited when your investments go up in value? Do you feel down when they are falling? If so, this just means you are human. But, the test of an investor is what you do, not how you feel. Do you ignore your emotions and stick to your plan or do you let emotion drive your decisions?

For example, investors often react much more strongly to the recent past than circumstances warrant. Remember when technology stocks kept going up and up in the late 1990s? Many investors piled on the technology bandwagon shortly before it overloaded and crashed. Nothing lasts forever - not a bull market or a bear market.

When stock or real estate or gold prices are high, investors often pile on thinking they will go higher. On the other hand, when a given market is having a 25% off sale, investors often stay away. Few of us enjoy it when stocks fall, but plan participants contribute regularly and that means your new contributions are going in at a time when stocks have fallen so they have more buying power.

The reason these investments are on sale is because other investors are dumping them due to emotion. Keep your emotions under control and you will be a better investor. Warren Buffett said that his success comes from being “fearful when others are greedy and greedy when others are fearful.”

In fact, Warren Buffett’s firm, Berkshire Hathaway, just announced a multi-billion dollar investment in Goldman Sachs.  Buffett is doing just what he has long recommended-buying when others are fearful.  This Bloomberg piece gives the details:

Goldman Chief Executive Officer Lloyd Blankfein is also raising $5 billion from Warren Buffett’s Berkshire Hathaway Inc. in a plan to shore up the firm’s capital base and restore market confidence…

Does Berkshire Hathaway’s purchase of Goldman shares mean a market bottom has been reached? Not necessarily.  However, it does indicate that a very savvy investor decided to buy Goldman shares because they were being sold at attractive prices.  No doubt there are other bargain-priced stocks as well.

Conclusion: As you can imagine, we are watching current economic and financial conditions very closely. So far, this has not been an enjoyable year, but we are confident that these conditions will eventually improve.

At this point, we do not know if ‘everything, but the kitchen sink’ has been thrown at us. Quite frankly, we doubt it. Nonetheless, we believe the U.S. economy and our financial markets are resilient and that they will survive this downturn and begin growing again.

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