Walter P.
St. Louis, Missouri

Mark Guerrero
Dallas, TX

Charles Snell
Beverly Hills, CA

Robert Stroz
Reno, NV

Sitting Around the Table July 22, 2002 Dow 7784 NASDAQ 1282 S&P 819 Russell 2000 379 July 22, 2002

JOIN NOW Get current investment trading insight & tips on today's top undervalued stocks

The risk is being out of the market

For years we have preached the concept of DON’T BE ON MARGIN. The wisdom of that statement is coming home to roost at this point in time. We have often spoken of Merrill Lynch documenting decades ago that the average life expectancy of a margin account is less t

han two years. Nothing really changes all that much. We at StocksAtBottom.com have felt for a long time that the secular excesses generated by the bull market of the 1990’s and indeed the 1980’s had not been fully worked out in the market place. When the various market indices made highs, it was inconceivable to us that the lofty prices obtained could remain at those levels. That is why we wrote a commentary in March of 2000 stating that we felt that the Internet bubble was the market peak. In retrospect it did prove to be the peak. You of course can only know this in retrospect.

Over $1.4 trillion was lost in the destruction of the Internet Bubble. There seemed at the time to be very little effect on the general market indices. We are now in the third year of general stock price declines in the general market indices. As of today over $7 trillion of market values have been vaporized.

On May 22, 2002, we wrote a major commentary telling you that we were repositioning our entire Stock Table in anticipation of a market decline. We thought the decline would come as a result of 2nd terrorist attack on the United States. Instead it came as a result of accounting scandals and the general aftermath of a stock market bubble.

Why you must be in the market?

First of all, recognize that only in the stock markets of the world and the American markets in general can you realize the returns that we have generated over the years. When you factor in the liquidity you have in stocks versus any other investment medium, it’s no contest.

People, including professional investors, always seem to get it wrong. This is certainly not the time to be out of the market. As markets go down, you take risk out of the market, not put risk in the market. If you were to go to cash in all your positions, you would in all likelihood never go back in the stock market. You would be whipsawed. This means you would watch the decline and then watch the ascent from the sidelines when this market comes roaring back as it always does.

We can remember in 1978 telling a customer to buy LTV convertible bonds at $95. The customer said, "I’ll wait in this environment until they trade to $90 and buy them there." The bonds did get to $92. They never traded to $90 and they ultimately were converted at $300 per bond. Again, the risk was being out of the bonds, not being in them.

You have to have a portfolio to make money. Now granted as markets come down in value, you would like to be in cash. We all would. It’s just not the reality for investors. You must be able to ride out the storms and have an intact portfolio when the inevitable advances come, as they will.

This is why the use of margin is a no-no. There isn’t a successful margin investor in the entire United States at the moment. Every margin investor in this country has been margined out. It’s that simple. Look at quality companies like Merck and Schering Plough. These companies over the next decade will look at this period in time as the moment of supreme buying opportunity. Again, this is only known in retrospect.

Is this decline different from others in the past?

The answer is yes absolutely. As a society we understand things about the economy and the stock market that we never dreamed of understanding decades ago. We are much more sophisticated as a society than we were in the 1960’s. The average American investor knows what’s going on. That investor did not know years ago what was happening. In fact years ago, the investor was clueless.

The Federal Reserve Board has an extraordinary handle on what’s going on. Alan Greenspan did us a disservice by not stepping in a year or two ago and increasing margin rate requirements. He would have saved us all a fortune by putting the brakes on. He simply did not want to be the person who was pointed at as the guy saying the party was over, and everybody has to go home.

Instead the markets were left to work out their own dis-equilibriums. Work them out, the market did. Many times I have written over the years, that there wasn’t a single mutual fund manager in the country who could remember a bear market. There are now. Most of these young go-go fund managers will be unemployed by the time this wash out is over.

Are we near a bottom?

Yes, we are. The vast majority of the declines in the general indices are over. Let us repeat that. Most of the pain is behind us. It is always darkest near the end of the storm. It is also a time at the end of the storm when it is very difficult to see the coming sunshine. What this means for us is that different stocks will bottom at different times. What is interesting now is the time compression involved. What use to take months and months to work out is now being done in weeks? Keep in mind that this is the third year of an over all market decline. It won’t go four folks, it never does.

Over the last twenty years we witnessed an extraordinary period of price earnings multiple expansion, and a wonderful market environment. That game is over. This is now a period of stock picking, plain and simple. And stock picking is where we come in.

This intense selling will end very shortly. We will see a sharp rally. After the sharp rally, there will be an strong period of sideways action, as well as sharp moves both up and down. Let’s take advantage of them.

This is what we must do

We have to go in and out of stocks. This is not a buy and hold cycle. We will ride them out and sell in the rallies. There will come a time, somewhere in the next six months or so when you will want to put stocks away. That period is not yet with us. This environment is no different than the bear market of 1973-1974. It is just being compressed into a shorter period of time.

You want to make sure you survive this period. Buy only quality at a quality price, so that time will bail you out if necessary. Make sure you do not invest over your head. This is a period to take advantage of portfolio restructuring, and sharp rallies up and down. We will be right there with you.

---

Your Friends At

StocksAtBottom.com

JOIN NOW
Get current investment trading insights
& tips on today's top undervalued stocks