I went to lunch with a guy today who was talking about things such as ‘the end of America’ and talking about a world in which nobody has a job. As I listened to this guys, I remembered a salient lesson that I was taught many years ago from a wise boss. It went something like this… when your taxi driver is telling you to buy stock, you know it’s time to sell. Let me expand…
In an earlier life I worked as a trading floor operator at one of the Stock Exchange’s in Australia. In fact, I was a trading floor operator during the “Great Crash” of 1987”. I still vividly remember arriving at the office on the morning of October 20, 1987 and hearing that the US market had fallen by 23% overnight!! (that would be equivalent to an overnight loss of over 2000 points at today’s prices).
Needless to say that the next few days were sheer madness on the trading floor. Radio reporters, TV reporters and the gallery full of people – many of whom were crying.
Here is a chart of the Dow Jones in the 3 months leading up to the ‘87 crash and for the next 10 or so days:
Compare that with a graph of what stocks have done this year since early June:
Certainly a bit worse than ‘87, but remember that all of the damage in ‘87 was done in just a few weeks – whereas the damage this time ‘round has been done over a longer period of time. I don’t think that it’s terribly different. Certainly there were terrible reports of people in both ‘crashes’ who committed suicide because of the crises!
My view is that, because of the fall, stocks are cheap. Well they’re certainly cheaper than they were 3 months ago! In fact, today I would be a buyer. Does this mean that I don’t think that stocks will fall any further? No! Not at all. But.. if they fall further, then my view would be that they would be even cheaper!
Overall I would suggest that this is probably a good time to do some buying – just don’t over commit to buying all of your stocks in one hit . Buy some today, and some in 6 months time. I can guarantee this – if you buy a basket of stocks today then, in 6 months time, that same basket of stocks will either be higher or lower than what you paid for them today. If they are higher then, today you got a bargain. If they are lower then you get the opportunity of averaging down.
Either way, a salient lesson is to remember what happened after the crash of ‘87. Here’s a graph of what happened over the next 10 years:
Not bad eh? If you’d borrowed $200K of tax deductable dollars then you would have turned a Dow Jones investment into a $1 million dollar asset. A similar investment in the NASDAQ would have turned into a $2 million asset!
If you are interested in making an investment then my advice is to get some advice from a good financial planner who will can establish your risk profile. This will help determine which class of assets to buy and also how to finance the purchase to take best advantage of tax implications.
Darren Neimke 