Tuesday, January 20, 2009

Welcome Mr. President to the Real World

Today we welcomed a new president who is full of hope and millions of Americans are looking to him for better days ahead. From the time the new president took his oath of office the stock market fell. At the final bell, the market closed at the low for the day. So far this month, 20 days, we are off just about 10%. The financial markets are in turmoil again and the major banks stocks look like they are getting ready to turn off the lights and lay everybody off tomorrow.

We broke the support level of the S&P 500 was broken so everything continues look like the end of the world. One equity mutual fund manager was asked today why he was not buying stocks. His response was, “why should I buy today when I can probably buy the ones I like in three months at the same price or perhaps even lower." I said in my last blog that we have a “confidence” problem in the markets. The response of the equity manager sums things up, why do anything now we will have time to buy and maybe at a better price.

In 1987, I was working with Wellington Management of Boston. Wellington manages a significant number of Vanguard mutual funds. You may recall that the market crash of October 19 had many people scared. On the 20th, I sat in the Wellington War Room and listened to John Neff, the legendary money manager of the Windsor Fund, say that “He was buying because he thought he just got another chance to get rich again.”

I had the chance to speak with John later and I told him I liked his courage in recommending to the Wellington managers to buy into the market. He said, “It didn’t take a lot of courage to buy at these levels.” I am not sure what John would say about the markets today, but I believe he would think there were many compelling values to buy. Sometimes it takes courage and conviction to buy at these levels.

On days like today ask yourself, am I being paid for waiting to have this investment go up? How long it will take the market to break out of the trading range will depend on how the markets react to the plans of the new President. If the markets believe that President Obama can change things, the markets will go up. President Obama does not have to do a lot now; he just has to come across as trying to make the change he promised. If he stumbles, the markets will fall back. Let us hope that he does not stumble.

Dan Perkins

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