 |
The stock market
is falling swiftly, and you don’t have the luxury of time. So I’ll
get straight to the point:
If you haven’t
done so already in response to our many earlier warnings, you’d
better sell or hedge your vulnerable investments now.
If you don’t, be prepared to suffer far deeper losses in the bear
market of 2008 and beyond.
But beware:
Most brokers will try to talk you out of it. They have a hidden
agenda. They want to keep you as a customer; and they know that,
once customers sell their stocks, they often close their brokerage
accounts.
With this in
mind, many brokers have been trained with up to seven sales pitches
designed to keep you in the market come hell or high water.
Broker
Pitch #1: “Buy more.” Their argument goes something
like this: “Your stock is now selling at bargain prices. So if you
didn’t already own 100 shares, you’d probably be thinking about
buying — not selling. Instead, why not double down and take
advantage of dollar-cost averaging?”
The more likely
result in a bear market: Every time your stock falls by another
$1 per share, instead of losing just $100, you’ll be losing $200.
Broker
Pitch #2: “Hold for a recovery!” They argue that
the “market will inevitably recover,” that the “recovery is always
bigger and better than any near-term decline,” and that you should
therefore “always invest for the long term.”
The reality:
Bear markets can last for years. It could take still longer for
the averages to recover to current levels. During all those years,
your money is dead in the water. And don’t forget: If the company
goes out of business, your stock will be worthless and will never
recover.
Broker
Pitch #3: “You can’t afford to take a loss.” If
you insist on selling, brokers often come back with this approach:
“Your losses are just on paper right now. So if you sell, all you’ll
be doing is locking them in. You can’t afford to do that.”
What they don’t
tell you is that there’s no fundamental difference between a paper
loss and a realized loss. Nor do they reveal that the Securities
& Exchange Commission (SEC) requires brokers themselves to value
the securities they hold in their own portfolio at the current market
price — to recognize the losses as real whether they’ve sold
the securities or not.
Broker
Pitch #4: “You can’t afford to take a profit and pay the
taxes.” If you’ve got a profit in a stock, they say: “All
you’ll be doing is writing a fat check to Uncle Sam. You can’t afford
to do that.”
The reality:
Although it’s not shown on your brokerage statement, the true value
of your portfolio is NET of taxes. So whether you or your heirs
pay those taxes now or in the future is mostly a difference of timing.
And if our next president approves legislation to raise capital
gains taxes next year, it could actually cost you more. Besides,
which would you prefer — paying some taxes on profits or paying
no taxes on losses?
Broker
Pitch #5: The “don’t-be-a-fool” argument. “Stocks
look very cheap now and we’re very close to rock bottom,” goes the
script. “We may even be right at the bottom. If you sell
now, three months from now, you’ll be kicking yourself. Don’t be
a fool.”
The truth: Brokers
don’t have the faintest idea where the bottom is. Nor does anyone
at their firm. And they know darn well that stocks do not hit bottom
just because they look cheap. Worse, for their own accounts,
brokers and their affiliates have been — and are likely to
continue — liquidating shares, often targeting precisely the
same shares they pitch to their customers.
Broker
Pitch #6: “The market is turning.” If the market
enjoys an intermediate bounce, which it certainly will at some point
soon, this pitch is invoked. “Look at this big rally!” they say.
“Your shares are finally starting to come back. After waiting all
this time, are you sure you want to run away now —
just when things are starting to turn around in your favor?”
The truth: In
a bear market, intermediate rallies actually give you the best opportunity
to sell.
Broker
Pitch #7: The last ace-in-the hole in the broker’s arsenal
of pitches is the patriotic approach. “Do you realize,”
they’ll say, “what could happen if everyone does what you’re
talking about doing? That’s when the market would really
nosedive. But if you and millions of other investors would just
have a bit more faith in our economy — in our country —
then the market will recover and everyone will come out ahead.”
The truth: Locking
up precious capital in sinking enterprises is not exactly good for
our country. Better to safeguard the funds and reinvest them in
better opportunities at a better time.
Surprise,
Surprise: The Wall Street Journal
Has Just Made Some of These Same Pitches
Given that the
Nasdaq lost more than 75% of its value in the early part of this
decade and that bank stocks are now down over 50% since their recent
peaks, you’d think Wall Street would have learned to refrain from
pitching the same old BS.
But if this
weekend’s edition of The Wall Street Journal is any indication,
little has changed …
“There’s a
decent argument to be made for buy and hold,” says the Journal.
“Aside from the absurdity of liquidating an entire equity portfolio
— the tax headaches would be epic — investors ultimately
end up better off than if they had tried to sell at the top and
buy at the bottom. ‘It’s hard to time the market, so stay in and
benefit from the inevitable turnaround,’ says David Dreman, chairman
of Dreman Value Management.”
In other words,
they’re telling you to sit it out and watch the value of vulnerable
stocks evaporate.
My view: This
advice is driven by the same hidden agenda still prevailing in the
brokerage industry — to keep you in bad stocks at all costs.
Were you entrapped
by similar pitches during the great tech wreck of 2000-2002? If
not, great! If so, don’t let it happen again. And in either case,
use it as a learning experience — to pull out some valuable
lessons that could save you a lot of money today …
Lesson
#1
Many Stocks Have Hidden Risks
That No One Tells You About.
Even during
the tech bubble, most investors recognized that there was a chance
their stocks could go down, at least for a short while. But they
never dreamed their tech stocks could go down so far nor so fast.
They had no inkling of the multiple, hidden risks that can drive
their portfolios into the gutter:
The
risk of earnings lies.
Let’s say a stock is selling for $40. And let’s say its earnings
are $2 per share. So it’s valued at 20 times earnings, and this
is considered fair. Suddenly, the news comes out that the earnings
are a bold-faced lie. The true earnings of the company is only half
what was stated — $1 per share. “Oh, no!” exclaim the investors.
“At 20 times earnings, it’s really only worth $20 per share.” The
stock promptly plunges to $20 — an instant 50% loss to shareholders.
In the tech
wreck, we saw this kind of outright fraud at big-name companies
like Enron, Worldcom, Tyco, and Adelphia. And we saw it repeated
hundreds of times with lesser companies. This time around, we see
a similar pattern among financial companies that continually understate,
cover up or even lie about their true losses.
Case in point:
In March 2007, a Bear Stearns hedge fund manager emailed a colleague
saying, “The sub-prime market is pretty damn ugly … I think we
should close these funds down.” Instead, the company soothed investors
with the message that “all was fine.” Three months later, the funds
failed and investors were left with less than 30 cents on the dollar.
The
risk of inflated Wall Street ratings.
In the tech bubble, Wall Street’s enthusiastic “buy” ratings —
often bought and paid for by the rated companies — drove thousands
of investors into stocks that weren’t worth the paper they were
printed on. When it became apparent that the stock ratings were
a sham, investor losses were greatly compounded.
Today, little
has changed. The SEC and Elliot Spitzer’s attempt to encourage independent
research on Wall Street has largely failed.
Worse, the ratings
issued by Wall Street’s leading government-sanctioned agencies —
Moody’s, S&P and Fitch — are still bought and paid for
by the rated companies, often resulting in inflated grades.
Case in point:
The rating agencies stalled for months before finally downgrading
the nation’s giant bond insurers, Ambac and MBIA. And despite the
recent downgrades, the ratings still fail to recognize that the
bond insurers’ entire business model — based on unanimous
triple-A ratings — has been destroyed.
The evidence:
Credit swaps being traded right now on Ambac and MBIA imply that
the probability of default over the next five years is an astounding
90%! And still they’re getting “A” or better ratings? It’s a joke.
The
risk of failure. The company goes out of business
and investors suffer a 100% loss. Unusual? Not quite. In the tech
wreck, at least 600 Internet companies went under. And between 1990
and 2002, bankruptcy claimed 390 insurance companies, 932 banks
and thrifts, plus tens of thousands of business corporations.
The situation
today: Although the Federal Reserve was able to ease the credit
crunch by dropping interest rates seven times and rescuing the likes
of Bear Stearns, analysts are now concerned that the Fed is running
out of options. What happens in the wake of the next big meltdown?
I don’t think you want to hang on to your financial stocks while
Wall Street tries to guess at the answer.
My
rule number one
of investing is: Never underestimate the risk.
Lesson
#2
So-Called “Free Advice”
Can Cost You a Fortune!
You can get
“free advice” from many sources — not just your stockbroker,
but also your insurance agent, your financial planner and other
professionals. But it isn’t really advice. And it certainly isn’t
free.
In the last
bear market, “free advice” — embedded in the hyped-up ratings
and research reports issued by major Wall Street firms — cost
investors a fortune, luring them into Nasdaq stocks that brought
losses averaging more than $75 for every $100 invested
near the peak. Plus, free advice in other areas — from bonds
to insurance — can be equally expensive.
With “free advice,”
you can actually get hurt in three different ways:
- You pay significant
fees that, despite any assurances to the contrary, inevitably
wind up coming out of your pocket. - You buy investments
that are more likely than usual to be underperformers or outright
losers. - You wind up
getting locked in to plans or programs that charge various kinds
of exit penalties. So when a better, alternative opportunity comes
your way, you have to either pass it up or pay through the nose
to switch.
In short, taking “free advice”
can be like walking into the ring with a professional wrestler.
First, he socks it to you with fees. Then, he dumps you into bad
investments. And last, he pins you down on the mat and won’t let
you go.
So my
rule number two of investing is: Never
act on so-called “free advice.”
How can you
tell? It’s actually quite simple. Everyone you deal with in the
financial industry is either a salesperson or an analyst/advisor.
It’s virtually impossible for anyone to be both at the same time.
The salesperson
will tell you he’s not charging you for the advice. He’ll tell you
it “comes with the service” or it’s covered by the transaction fees
or commissions. That’s a dead giveaway.
The analyst
(or a true advisor) tells you, up front, what he’s going to charge
you, he charges the fee, and then he tells you what he charged you.
It couldn’t be clearer.
The fee could
be something in the neighborhood of $100 per year for a subscription
to an investment newsletter. Or it could be, say, $100 per hour
for a personal consultation. That’s cheap insurance that can save
you — or make you — a tidy sum.
Still not sure
how to distinguish between a salesperson and a true analyst or advisor?
Here’s what I suggest: No matter whom you encounter in the financial
industry — stockbroker, insurance agent, financial planner
or banker — ask these questions:
1. Do you
(or your company) make more money the more I buy? If the answer
is yes, you’ve got a problem right off the bat. Often, the best
investment decision is not to buy. And sometimes an even
better decision is to sell. If buying nothing or selling
is going to be a negative for his earnings, you don’t have an advisor.
You’ve got a salesperson posing as an advisor.
2. Who pays
your commissions or fees? If he says it’s someone other than
you, he’s probably lying. Shake his hand, bid him farewell and walk
out the door. No financial institution I’ve ever heard of really
pays sales commissions out of its own pocket. If a salesperson is
making commissions, it always comes out of your pocket,
directly or indirectly.
3. Where
are you getting the information or report you’re giving me?
If the answer is a source that will benefit from your purchase,
you can probably throw most of the info into the trashcan.
In the tech
wreck, investors got hooked by salespeople repeatedly. And the same
is happening right now. But with these three questions, you can
discard the salespeople and find the true advisors. They are those
who are …
- Always compensated
by you — not by the companies whose financial products you
buy. - Always compensated
for their time or their information — not for a sale. - Always your
advocate and defender. Whether it’s just a normal, friendly transaction
or a heated legal dispute, it’s always crystal-clear which side
they’re on — yours and only yours.
I repeat: “Free
advice” is neither free nor advice. Sooner or later, it could cost
you a fortune in terms of mediocre performance or, worse, outright
losses.
Am I being overly
harsh on ethical brokers, sales agents and financial planners? Perhaps.
But only in the sense that it’s not really their fault. It’s the
system that’s rigged against you.
You see, even
the most well-meaning salespeople still have to make a living. But
they can’t make a good living if they tell their clients to stay
out of the most popular stocks … avoid mutual funds that charge
a big fee … or stick with insurance policies that pay the lowest
commissions. Nor can they afford to recommend investments that involve
very low fees and commissions, which happen to include some
of the best choices you can make today.
If they consistently
give you this kind of advice, they can’t put food on the table for
their families — let alone send their kids to a good college.
And they’ll never be eligible for the big bonuses and rich rewards
that inevitably flow to the top-performing salespeople.
Many salespeople
do try to be as ethical as they can be within the limitations of
the system. They’re friendly and helpful. They bend over backwards
to do right for their clients. But they’re still salespeople. Work
with them to buy the products you want. But get your information
and advice elsewhere.
Lesson
#3
Wall Street’s “Rules of Thumb”
Are Often Flawed or Deceptive
The bias revealed
in the last bear market went beyond just recommending bad investments.
It also was the source of many investing “rules” promulgated by
Wall Street pros and blindly accepted by most investors —
most of which were myths in disguise.
Some examples
…
Myth:
“Always invest in stocks for the long term.” You saw this
in The Wall Street Journal story I just quoted. And you’ve
probably heard it in many other permutations as well: “Historically,
stocks have always moved higher,” they say. “Bull markets are longer
than bear markets,” goes the argument.
The reality:
Most of the stats they cite assume you bought stocks after
a major decline, when they were at rock bottom. The reality is few
people ever buy at those levels. Indeed, most people tend to buy
most of their stock after a major rise, when stocks are
very pricey. For example:
- If you bought
the average Dow Jones Industrial stock before the Crash of ’29,
you would have lost 89 cents for every dollar invested. And even
if you had both the cash and the courage to hold on (few did!),
you’d still have to wait 24 years — a full generation —
before you could recoup your original investment … and another
20 years before you could catch up with an investor who just
earned a steady 5% yield during that period. - If you bought
the average Dow stock at its peak in 1973, you would have lost 45.1%.
The Dow touched an all-time high of 1051 on January 11, and then
dropped for two years, hitting 577 in December 1974. It did not
cross above 1000 again until eight years later. - Losses in
many so-called “conservative stocks” were just as bad. If you bought
the average utility shares, considered safer than most stocks, your
losses would have been 88.2% in 1929-32 and 45.3% in 1973-74. - All the averages
understate the true losses and recovery periods. Reason: Bankrupted
— or greatly downsized —companies are routinely removed
from the averages and replaced with cream-of-the-crop companies.
If your portfolio includes some of those companies, your losses
will be worse than the averages and your recovery period will be
longer.
Myth:
“Don’t sell in panic. It’s probably the bottom.” Why is
it that when brokers sell, it’s supposedly based on reason —
but when you or I sell, they say it’s based on emotion?
The classic
example they like to remind you of is the Crash of ’87, which took
the Dow down 36% in a big hurry, and then was over almost as quickly
as it began. “People who sold at the bottom of the ’87 crash missed
out on the biggest bull market in history,” they say.
The reality:
There are two problems with that argument. First of all, even if
you sold at the very worst time in 1987, there were many, many opportunities
to buy back into the market in subsequent months.
Second, their
recommendation not to sell didn’t work too well in 2000-2001. The
pundits unanimously declared a bottom in April 2000 when the Nasdaq
was off 37.1%. Then, they declared another bottom in December 2000,
when it was down 55.4%. If you followed their advice, instead of
getting hurt just once, you got killed again and again.
Then, ironically,
when the Nasdaq did hit a bottom — that’s when the majority
of “experts” on Wall Street themselves began to panic! Reflecting
the nearly unanimous pessimism of Wall Street experts, Business
Week advised its readers to dump their shares even if they
had already plunged 80% or 90%. Time’s front cover featured
a mean bear and warned of more big trouble ahead. Nearly all the
great “bulls” on Wall Street temporarily abandoned their optimistic
bent and “warned” you about events that had already happened.
My
rule number three of investing: Sell BEFORE
the panic stage. In practice, that means selling just as soon
as your stocks fall below a predetermined loss level that you’re
comfortable with. The actual level will vary, and certain investments,
like options, must be treated differently. But generally, a 20%
decline in a stock is a key level to consider.
Myth:
“Mutual funds have smart managers. They will give you diversification.
They will protect you.”
The reality:
Mutual funds are neither manna from heaven nor the holy grail of
investing. In the great stock market years between 1997 and 1999,
only 24% outperformed the S&P 500.
In 2000-2001,
the smart, sophisticated mutual fund managers running tech funds
got scammed just like everyone else. In fact, every single one of
200 tech stock funds lost money, with 72.5% of the funds losing
more than the Nasdaq Composite Index. So much for expertise
and diversification!
Four
More Rules of
Investing in Today’s Market
My
rule number four: Keep a substantial portion
of your money in cash or cash-equivalent, including foreign currencies.
(For specific instructions, see my two-weeks-ago Money and Markets,
Triple
Crisis: Your First Defense.)
My
rule number five: Hedge with inverse ETFs —
special exchange-traded funds designed to go UP in value when the
market goes down. (For my step-by-step plan, see last Monday’s Money
and Markets, The
Triple Crisis Strikes Harder.)
My
rule number six: Diversify over a broad spectrum
of other investment classes, including natural resources like oil
and natural gas. (If you want to get Sean’s oil report coming out
tomorrow, today’s your last day to sign up. Click
here. And if you invest in oil and gas stocks, be sure to also
follow my rule number five for protection.)
My
rule number seven:
If you work with a money manager, ask him about his programs designed
for a bear market. If he doesn’t have one, move your assets to one
who does.
Good luck and
God bless!
Martin
About
Money and Markets
For
more information and archived issues, visit http://legacy.weissinc.com
Money
and Markets (MaM) is published by Weiss Research, Inc. and
written by Martin D. Weiss along with Tony Sagami, Nilus Mattive,
Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To
avoid conflicts of interest, Weiss Research and its staff do not
hold positions in companies recommended in MaM, nor do
we accept any compensation for such recommendations. The comments,
graphs, forecasts, and indices published in MaM are based
upon data whose accuracy is deemed reliable but not guaranteed.
Performance returns cited are derived from our best estimates but
must be considered hypothetical in as much as we do not track the
actual prices investors pay or receive. Regular contributors and
staff include Kristen Adams, Andrea Baumwald, John Burke, Amber
Dakar, Dinesh Kalera, Christina Kern, Mathias Korzan, Red Morgan,
Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau
and Leslie Underwood.
Attention
editors and publishers! Money
and Markets issues
can be republished. Republished issues MUST include attribution
of the author(s) and the following short paragraph:
This
investment news is brought to you by Money and Markets.
Money and Markets is a free daily investment newsletter
from Martin D. Weiss and Weiss Research analysts offering the latest
investing news and financial insights for the stock market, including
tips and advice on investing in gold, energy and oil. Dr. Weiss
is a leader in the fields of investing, interest rates, financial
safety and economic forecasting. To view archives or subscribe,
visit http://legacy.weissinc.com.
From
time to time, Money and Markets may have information from
select third-party advertisers known as “external sponsorships.”
We cannot guarantee the accuracy of these ads. In addition, these
ads do not necessarily express the viewpoints of Money and Markets
or its editors. For more information, see our terms
and conditions.
|
© |
15430 |
