I'm Losing Control!!

Todays post gets at the heart of the issue in times like this. I'm reprinting article from Jason Zweig. Zweig writes a column for the WSJ and is a writer we quote often in our coaching sessions with clients as well as our regular day to day interection with you. Todays column is appropriate and very timely. Please take the time to read it in its entirety. You'll be glad you did.

THE INTELLIGENT INVESTOR
OCTOBER 7, 2008
By Jason Zweig

So do you feel like quitting yet?

If Monday's 800-point intraday plunge in the Dow Jones Industrial Average made you want to give up and get out of stocks, you're not alone.

I've written column after column advising investors to buy stocks on the way down, and readers are in pain. "You say not to bail," one reader emailed me over the weekend, "but all funds are down. ... This whole stock market has me so upset, [I feel] like a deer in the headlights." Another wrote: "We are, you see, about to enter another Great Depression, just like the last one only much worse. ... It's way too early to be buying stocks. ... Or I could be really nasty and ask you which brokerage house paid you to run this stupid column now."

Right or wrong, I work only for The Wall Street Journal. But what all of us are feeling is the loss of control we sense when we are faced with anything that is frightening, inexplicable and important.

That lack of control not only makes us feel powerless; it also changes the way we view the world. Very small amounts of fragmentary information can suddenly seem to be fraught with meaning: Did something move on "the grassy knoll" the day John F. Kennedy was assassinated? Will one down day in the stock market lead to another and another?

Even the greatest investors have felt the same kind of fear and pain you are probably feeling. For proof, look no further than "Security Analysis," the classic textbook by Benjamin Graham and David Dodd, which has just been reissued in a commemorative edition. Graham was one of the best money managers of the 20th century, a brilliant analyst and market historian, and Warren Buffett's most influential teacher and mentor.

The new book reprints the text of the 1940 printing, in which Graham addressed the market devastation of the previous decade. Just as the roughly 90% fall between 1929 and 1932 had seemed to be fading, the stock market dropped sharply again in the late 1930s. As market historian James Grant puts it, by the time Graham was ready to finish the 1940 edition, "He had had it."

That helps explain one of the great ironies of market commentary. Graham himself stuck largely with stocks in his investment fund. But at the conclusion of his book, he advised the institutional investors among his readers to shun the stock market entirely and invest in bonds. Graham doubted they could stomach "the heavy responsibilities and the recurring uncertainties" stirred up by stocks.

How does the feeling of being overwhelmed affect investors? Research conducted by psychologists Jennifer Whitson of the University of Texas and Adam Galinsky of Northwestern University shows how it changes our perceptions. In one of their experiments, people were first rattled by a computer that gave them unpredictable feedback on their performance at a trivial task, stripping them of their sense of control. These people became much more likely to perceive shapes in a swarm of random dots.

"When you sense that you have a lack of control," says Prof. Whitson, "you're much more likely to try twisting and pretzeling explanations and seeing patterns that aren't even there."

In a related experiment, investors who had been stripped of their sense of control by market volatility were convinced that they had read more negative evidence about a company than they had actually seen -- and were less willing to buy the company's stock.

In other words, when our sense of control is threatened, we feel the natural urge to pretend that whatever information we do have is more complete and reliable than it is. Imagining that we know what's coming next (even if we think it will be bad) gives us a slight feeling of comfort.

As an investor, however, it's absolutely vital to separate what you can truly control from what is beyond your control. The only thing you can know for sure is that stocks are steadily getting cheaper. You cannot control whether or not the market will continue to trash stocks, but you can control how you respond.

If we are not headed into a depression, panic hardly seems justifiable.

What if we are?

Even during the Great Depression, the best investment results were earned not by the people who fled stocks for the safety of bonds and cash, but by those who stepped up and bought stocks and kept buying on the way down. A man named Floyd Odlum made millions of dollars putting his cash into battered stocks. His motto throughout the market nightmare of 1929 to 1932 never changed:

"There's a better chance to make money now than ever before."

The Common Sense Fix

A friend forwarded a common sense plan aggregated by Dave Ramsey, a Tennessee based nationally syndicated radio talk show host. Ramsey is also the author of a best selling book called Financial Peace, a book I have read more than twice personally and have handed out on more than one occasion.

To be transparent, he and I don't see perfectly eye to eye on everything from a personal finance perspective which many of you have heard me say, but 90% of the time we are in step with each other. On the issue of this $700 Billion bail out plan, I agree with him.

Many of you have asked me what I think should happen. This is along the lines of my thinking.

The Common Sense Fix:

Years of bad decisions and stupid mistakes have created an economic nightmare in this country, but $700 billion in new debt is not the answer. As a tax-paying American citizen, I will not support any congressperson who votes to implement such a policy. Instead, I submit the following threestep Common Sense Plan.

I. INSURANCE

a. Insure the subprime bonds/mortgages with an underlying FHA-type insurance. Government-insured and backed loans would have an instant market all over the world, creating immediate and needed liquidity.

b. In order for a company to accept the government-backed insurance, they must do two things:

1. Rewrite any mortgage that is more than three months delinquent to a 6% fixed-rate mortgage.

a. Roll all back payments with no late fees or legal costs into the balance. This brings homeowners current and allows them a chance to keep their homes.

b. Cancel all prepayment penalties to encourage refinancing or the sale of the property to pay off the bad loan. In the event of foreclosure or short sale, the borrower will not be held liable for any deficit balance. FHA does this now, and that
encourages mortgage companies to go the extra mile while working with the borrower—again limiting foreclosures and ruined lives.

2. Cancel ALL golden parachutes of EXISTING and FUTURE CEOs and executive team members as long as the company holds these government-insured bonds/mortgages. This keeps underperforming executives from being paid when they don’t do their jobs.

c. This backstop will cost less than $50 billion—a small fraction of the current
proposal.

II. MARK TO MARKET

a. Remove mark to market accounting rules for two years on only subprime Tier III
bonds/mortgages. This keeps companies from being forced to artificially mark down
bonds/mortgages below the value of the underlying mortgages and real estate.

b. This move creates patience in the market and has an immediate stabilizing effect on failing and ailing banks—and it costs the taxpayer nothing.

III. CAPITAL GAINS TAX

a. Remove the capital gains tax completely. Investors will flood the real estate and stock market in search of tax-free profits, creating tremendous—and immediate—liquidity in the markets. Again, this costs the taxpayer nothing.

b. This move will be seen as a lightning rod politically because many will say it is helping the rich. The truth is the rich will benefit, but it will be their money that stimulates the economy. This will enable all Americans to have more stable jobs and
retirement investments that go up instead of down.

This is not a time for envy, and it’s not a time for politics. It’s time for all of us, as
Americans, to stand up, speak out, and fix this mess.

How to measure Bear Market benefit to YOUR savings

Is the Bear Market good for me?

We've been talking about the advantages of the Bear market in our web seminars. You may have read the quotes by Warren Buffet about how he looks forward to declining stock prices. The 24/7 financial news channels are working hard to spin the Bear Market as, “not so bad” for investors. Why then, are folks still not comfortable seeing their 401k and other savings dropping 5%, 15% and 25%? Why are large investors pulling billions of dollars out of the stock markets? How come you don’t feel love for the Bear??

The reason is uncertainty! How much real risk is there? “What does the worst case look like?” “What if everyone else bounces back but I don’t?!” “How can I be sure I am not being played for a fool?”

There is a way to measure risk in your investment strategy. Harry Markowitz developed a theory in the 1950’s that he won a Nobel Prize for in 1990. We can apply his formula to your current investment strategy. We can calculate an expected return for different levels of volatility that you accept for your investments.

Learn how to build Peace of Mind into your investments. Depending on your tolerance for risk, you will still see ups and downs in your invested savings. Learn what acceptable volatility looks like for your investments. What potential is there for volatility next year?

Sign up for one of our informational web seminars and attend our next educational event in October. Register on line at www.vanderwey.com or simply choose the 'workshops' tab to the right and select the seminar tab at the bottom of the page.