Wisdom During the Sell-Off

I was in France the last time the markets sold off. Every time I leave the country, the markets go in the tank. But seriously, I’m sitting here watching the market as if it were some drama reaching a climactic conclusion. We live in truly extraordinary times.

I have been thinking a lot about the market and the beating we’re taking. It is the worst year I have ever had. Personally and professionally, this year will be — barring some fantastic rally — the worst year I’ve ever experienced. Far worse than the 2000-2002 meltdown, which I largely avoided. I actually made money during that stretch.

But this is wholly different. This is a crisis cutting deep into the very foundations of our financial markets. There has really been no place to hide in the stock market — just about everything has come down, and come down a lot, in hardly any time at all.

A few thoughts on what we’re seeing happening in this credit crisis. As I said, this is severe. This is the real deal. And I think it is possible good companies could go down as the credit markets lock up.

Just today, the Financial Times reports: “A virtual funding freeze…has affected even top-rated companies such as General Electric…and AT&T.” It’s a dangerous time. The fear out there is extreme. That explains why the yield on one-month Treasury bills fell to zero at one point during the recent panic. Investors just wanted safety. They didn’t care about yield. They wanted a place to put their money where they can be sure they will get it back.

Hence, the rush to Treasury securities. On the last day of the quarter, the 10-year note hit 3.83%. If you bought the 30-year T-bond a year ago — which most people thought was a dumb bet — you would have netted a 16% return one year later, as rates fell and your bond price rose. Not bad, huh?

This rush for safety is also rallying the U.S. dollar. Despite all its flaws and all that it’s been through, when people are scared, they want the old greenback. Cash. Commodities, meanwhile, have sold off something fierce.

It’s important to remember, though, that these things happen in markets from time to time. It can be difficult to know what to do when we’re in these times. On the train out here from Paris, I read a little commentary from John Templeton, the great investor who died earlier this year. Templeton lived to the ripe old age of 95. He was a man who’d seen a lot of water go under the bridge, so to speak.

So it’s appropriate, I think, to pull some wisdom from his comments. Some of them are particularly good for times like these. Here is one snippet:

“We have never been able to predict business cycles and we have never been able to predict stock market cycles…and we have never found any person whose predictions on this are right more than 60% of the time. But we say to our clients, ‘Don’t worry about it. Prepare yourself. You know there’s going to be a bear market. And you know there’s going to be a business recession. You just don’t know when.’”

Wise words, these. And keep in mind this is one of the greatest investors of all time. He goes on to say that you prepare for these periods by staying out of debt and keeping your own personal financial house in order. He also says: “You prepare yourself psychologically so you don’t get so frightened at the wrong time that you sell out foolishly. So if you are fully prepared and know you are going to live through bear markets and recessions, you can regard them not only without worry, but also as opportunities…”

Great stuff. By the way, the above comments are from the latest issue of Outstanding Investor Digest, a newsletter I’ve subscribed to for years. It comes out infrequently and has no stock picks. It just collects and publishes insights from some of most successful money managers around. I’d recommend it, if you enjoy that sort of thing.

For now, I’m trying to think like Templeton and see the market as one of opportunities.

Chris Mayer
October 7, 2008