Friday, March 02, 2007

Stock Market Declines - October Worries Investors

The month of October has historical significance in the stock market because that one-month has proven to provide many downside surprises even for the most experienced investors. This week, Wall Street took a pause from its ever upward trend and had a one day sell off that resulted in an almost 500 point decline in the Dow Jones Industrials average. Since most people don’t have a clue about the stock market, the vast majority of people just follow the crowd when it comes to stock market timing. Add this to the “panic factor” of some investors that have invested all of their money in stocks and you occasionally get a bad one day sell-off in major stock markets around the world. A few months ago I discussed my opinions about investments in the US and I wrote at that time that I believe when stock prices are rising, the real estate market in declining. Now with rising interest rates on home loans, it makes sense that the smart money is migrating back to the stock market.

Investing in any stock can cause even the most even keeled investor to fall into panic from time to time. In the late 1990’s there were many people, including myself that became hooked on huge triple digit gains in some NASDAQ Internet Stocks. It is hard to control ones excitement when some Internet stocks were gaining over 100% in value every single year. With the middle class in the United States being forced to live without decent wage increases because of foreign labor competition, some people try to use the stock market to supplement their income. This is a huge mistake that will eventually lead to financial ruin if people don’t wake up and realize that stock investment are for risk capital and invested for the long run. With Democrats now in control of Congress, there is a real chance that the US will move toward universal healthcare and that move could put major healthcare providers and insurance company stock in danger of huge future declines. I believe it is just a matter of time before universal healthcare becomes a reality in the United States and it is most likely to occur when Democrats are in control of both the White House and Congress.

US history is filled with Bull and Bear Markets and most of the time average investors never learn the lessons of history when it comes to financial decisions like purchasing stocks. In the late 1990’s, millions of people lost billions of dollars when the NASDAQ stock market collapsed and while it is easy for people to see with the aid of hindsight now why that market collapsed. At the time with all that euphoria it was not nearly as clear cut of a potential disaster than it eventually turned out to be. Some Internet Stocks of today remind me of the late 1990’s because they seem to rise everyday with little, obvious, downside risk. Google is one of those stocks and many people worry about the stock price increases at this huge company over a short period of time. One thing does separate Google from high flyers in the late 1990’s and that one thing is that Google makes a lot of money. In the early days of the Internet very few companies earned a profit and no one back then earned anything close to what Google earns these days. I still believe the best way to gage the future of the stock market is to watch the housing market closely. As big money leaves the real estate market is usually migrates into the stock market in one way or the other.

There is no doubt that stock investments are successful over the long run, if the investor remains diversified in many different companies and sectors. However, some CEO’s do make mistakes either in judgment or they commit outright fraud, which causes some people to avoid investing in the stock market. Last year, CEO Patricia Dunn of Hewlett Packard was so upset that someone, on that companies board of directors, was leaking confidential company information that she hired a private detective to investigate her own board of directors to discover that persons identity. No case of CEO fraud has come close to the exploits of Ken Lay at Enron. Lay’s smooth talking style allowed him to convinced Enron employees to continue to purchasing company stock, while he and a few other top executive were selling all of their shares on the open market. Every now and then someone like Ken Lay will come along that has the intelligence to build a great company, but lacks moral redeeming values when mistakes are made and a stock price decline is inevitable. Ken Lay died shortly after his court conviction, but many former Enron employees will never forget how this one man ruined their retirement plans.

The one constant in the stock market is the boom and bust cycles that happen from time to time. No stock market will go up all the time and no market will continue to drop, forever. It is always best to buy a diversified portfolio and hold those investments for ten years or more. Some people have personalities that will never enable them to invest in the stock market because of the daily worry factor that effects their life. These types of people should stick with T-Bills, bonds and old fashion CD’s at their local bank. I have made so many mistakes investing in the stock market over the years, I have decided to put what little money I do have only in safe investments. In closing I would like to pay tribute to the late Louis Rukeyser that hosted “Wall Street Week” for years on PBS. Mr. Rukeyser did more to teach Americans about the stock market than anyone else did in the 1980’s and 1990’s and he will certainly missed (by many people, like myself) that trusted his opinions. Louis Rukeyser had a way of explaining the stock market in layman’s terms with a smooth delivery style and a huge smile upon his face. Investing in the stock market should be fun, if it is not fun for you I would recommend getting out of the market entirely and placing your investments in place that guarantees the principle and pays a regular rate of interest.

Related: US Style Economy, Follow The Money, Bipolar Stock Market, Boom And Bust, Finding Good Investments

Stock Market Declines

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