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Everybody wants to know if it is time to buy stocks and financial advisors, brokers and analyst are quick to say Yes because stock prices are cheap. If you are one of those investors asking if it is a good idea to buy stocks right now, then please take into consideration the following points before investing any money:
1. - The stock price is not a reason to buy. Most people see a share price going from $50 to $10 and they jump in thinking that it is cheap and it is going back to $50. Stock prices don’t have an obligation to repeat themselves. Most of the times, when you see a price going lower it is because of a reason; it could be related to the company, its industry, or the World economy. Before jumping into that stock make sure you understand the reason for its current price and also have a good reason or argument of why it should go back up. Always remember that a $2 stock does not mean the stock is cheap, it could go to zero.
2. - There is no direct relationship between time and stock profits. Investors and analyst believe that you should buy stocks and whatever happens with the price of the stock does not matter because you as an investors are “for the long run”. The Buy and Hold technique does not guarantee a better return on your investments, and even can become a very risky proposition. First of all, if you want to really be successful with a “buy and hold” strategy you really need to make some market timing. If you follow investor’s psychology, you will realize that small investors are usually the last one to buy into a bull market and also the last ones to sell into a bear market. This means that usually small investors will tend to buy stocks at higher prices only to see them turn into a loss during down markets. Also, it is safe to assume that if you are one of those investors that put money into a 401K or stock mutual fund every month, then the longer the markets go higher, the more money you are going to be willing to put into those type of products every month. So if you really want to be successful on a Buy and Hold strategy, you need to buy stocks during down markets when everybody else is selling. In order to do that, you need to accept the risks involved in playing against the crowd.
As mentioned before, stock prices don’t have an obligation to go higher over time, and eventually the market goes South and people start to see their investment going lower and lower everyday. If you are one of those investors that purchased shares years ago thinking on keeping them for the “long term” you might see your portfolio down 40% or more and worst of all you have a very good chance that you own stocks that will probably never recover. Think about Yahoo trading over $150 during 1999, or GM trading at $50. Those stocks will probably never recover to those prices; there is more probability for those companies to disappear.
Buy and Hold is not the answer because it leaves out the most important part of the investment process, selling the stock. You will never make money on stocks if you don’t sell them. It is so absurd, that people sometimes prefer to get a loan from their bank using their stocks as collateral instead of just selling their shares. I know what you thinking, what about taxes? You tell me what is best for you: paying taxes on your gains, or risking all your net worth to a down market only in order to avoid paying taxes?
So, if you want to know if it is a good time to buy stocks, my advise to you is to look for companies in well establish industries, and start investing little by little over time, but always have in mind an exit plan in order to take your profits. Look for the best-positioned companies in industries that will perform during the next administration and stay away from broken industries such as automobiles and airlines.
Wednesday, December 24, 2008
Monday, October 27, 2008
The Blame Show
Last week I saw Mr. Greenspan presentation before Congress. He admitted that his views were not correct regarding the housing market, and the financial models he followed had a big mistake: not enough historical information to come to the right conclusion. During the last weeks, Congress has been very busy putting a show for America. Who can we blame today for this mess? They are questioning everybody in Wall Street to show the World that they are worry about this problem, and that they are taking the necessary steps to protect the American Taxpayer from “all these corrupt people in Wall Street”. I am sorry, but these are just plain excuses. What about their responsibility? What about their participation in 1999 in the decision that Fannie Mae and Freddy Mac should not be as rigorous in lending money to potential homebuyers? When is the American people going to call Congress and ask them why they allowed those irresponsible measures that helped in a big way to create all this mess that now everybody, except for them is paying for? I am sorry, but it is just too easy to blame everybody for a problem while at the same time hiding behind a big desk and title in order not to be accountable for their participation in the problem.
I am not saying that some of the people or companies that are being questioned are innocent. I am just saying we should be very clear why this happened and put everything in the right spectrum in order to avoid happening again. It is very important to understand the political and financial mistakes made by the United States Congress specially now that the US Government is putting money in our biggest financial institutions. The financial system in the United States has a serious danger of becoming a toy tool for politicians in the future. If taxpayers money is in the balance sheets of big financial institutions it will only be a matter of time until some irresponsible member of Congress proposes a law to require those financial institutions to lend money more freely to homeowners, small business and everybody else. They can do that because when things explode it is never their fault; they are only responsible for putting a big show, the “Blame Game Show” for everybody to see.
Until next time,
JCM
I am not saying that some of the people or companies that are being questioned are innocent. I am just saying we should be very clear why this happened and put everything in the right spectrum in order to avoid happening again. It is very important to understand the political and financial mistakes made by the United States Congress specially now that the US Government is putting money in our biggest financial institutions. The financial system in the United States has a serious danger of becoming a toy tool for politicians in the future. If taxpayers money is in the balance sheets of big financial institutions it will only be a matter of time until some irresponsible member of Congress proposes a law to require those financial institutions to lend money more freely to homeowners, small business and everybody else. They can do that because when things explode it is never their fault; they are only responsible for putting a big show, the “Blame Game Show” for everybody to see.
Until next time,
JCM
Thursday, October 16, 2008
The markets keep falling down and everybody is looking for someone to blame. Main Street and politicians blame CEOs from different companies accusing them of incurring huge risks, getting incredible payouts from those risks and now the American taxpayers have to pay the bill for their mistakes.
Unfortunately things are not that simple. Of course some people made terrible mistakes on their assumptions and basically financial firms created products that did not fully understand. I also think that it would be fair to put some kind of restrictions on the payouts and salaries Board of Directors and top management receive in public companies. But at the same time, it is not fair to blame everything on them. The truth is that those same politicians that are calling every CEO in the country a thief are also to blame and actually they have a huge percentage of the blame in this problem. In 1999 under the Presidency of Bill Clinton, Congress passed a law that aloud and encouraged Fannie Mae and Freddie Mac to lower their standards for mortgage loans. They said that Fannie Mae and Freddie Mac should accept mortgage from people with no so good credit reports because everybody in America has the right to purchase a home. That was the beginning of the credit crisis in America.
Later in 2001 the five investment banks (Bear Stearn, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Goldman Sack) asked the SEC to aloud them to increase their leverage to 40 to 1 instead of the 12 to 1 they were aloud at that time. The SEC accepted immediately that proposal and that was the second most important reason for the real estate bubble to start. The 5 investment banks started to demand more and more mortgages from brokers in order to create the infamous CDS and other mortgage products that started trading with no regulation and no transparency in the markets. More demand in mortgages meant giving more money to people with less and less restrictions.
Finally, in 2005 the Government of George W. Bush tried to pass a law limiting the risks taken by Fannie Mae and Freddie Mac. Congress rejected that law, both parties Democrats and Republicans. We all know what happened next. The Government took Fannie Mae and Freddie Mac, and the 5 investment banks disappeared; only Morgan Stanley and Goldman Saks are still in business but as commercial banks.
Next time you hear your politicians blaming everybody for what is going on today, ask him/her where were them when those laws were passed and why he/she never sounded the alarm based on everything that was going on. Everybody knew there was a bubble in the real estate market, and nobody did everything about it. Today, as always when we are in the middle of the crisis, everybody is blaming at everybody. History will repeat itself because nobody assumes its own faults, in the future will have another crisis and then you will hear again the same politicians calling everybody a thief. We won’t learn from this painful experience.
JCM
Unfortunately things are not that simple. Of course some people made terrible mistakes on their assumptions and basically financial firms created products that did not fully understand. I also think that it would be fair to put some kind of restrictions on the payouts and salaries Board of Directors and top management receive in public companies. But at the same time, it is not fair to blame everything on them. The truth is that those same politicians that are calling every CEO in the country a thief are also to blame and actually they have a huge percentage of the blame in this problem. In 1999 under the Presidency of Bill Clinton, Congress passed a law that aloud and encouraged Fannie Mae and Freddie Mac to lower their standards for mortgage loans. They said that Fannie Mae and Freddie Mac should accept mortgage from people with no so good credit reports because everybody in America has the right to purchase a home. That was the beginning of the credit crisis in America.
Later in 2001 the five investment banks (Bear Stearn, Morgan Stanley, Merrill Lynch, Lehman Brothers, and Goldman Sack) asked the SEC to aloud them to increase their leverage to 40 to 1 instead of the 12 to 1 they were aloud at that time. The SEC accepted immediately that proposal and that was the second most important reason for the real estate bubble to start. The 5 investment banks started to demand more and more mortgages from brokers in order to create the infamous CDS and other mortgage products that started trading with no regulation and no transparency in the markets. More demand in mortgages meant giving more money to people with less and less restrictions.
Finally, in 2005 the Government of George W. Bush tried to pass a law limiting the risks taken by Fannie Mae and Freddie Mac. Congress rejected that law, both parties Democrats and Republicans. We all know what happened next. The Government took Fannie Mae and Freddie Mac, and the 5 investment banks disappeared; only Morgan Stanley and Goldman Saks are still in business but as commercial banks.
Next time you hear your politicians blaming everybody for what is going on today, ask him/her where were them when those laws were passed and why he/she never sounded the alarm based on everything that was going on. Everybody knew there was a bubble in the real estate market, and nobody did everything about it. Today, as always when we are in the middle of the crisis, everybody is blaming at everybody. History will repeat itself because nobody assumes its own faults, in the future will have another crisis and then you will hear again the same politicians calling everybody a thief. We won’t learn from this painful experience.
JCM
Friday, October 10, 2008
The First Blog
Hi everybody, today October 10,2008 is the first time that I write for this Blog. This will be a Blog about Financial Markets, I will give my opinions about the US and the World Economies, about Financial Markets in general like stocks or commodities and I will even give some recomendations every know and then, based in whatever I am looking at.
I hope people find this information helpful and will come back to read about my thaughts and analysis.
As the moment of this writing, the Dow Jones is 400 points down, it started 700 points down and then recovered, and we will see where it goes from here. We are in the middle of a financial crash that will be remember for years from now. We will remember how much money we lost (individually and as a country), we will remember the firms that dissapeared already and the ones that will dissapear in the near future. But we won't remember what brought us to this point and which laws and changes from Washington made all this mess possible. By not remembering how we got to this point, we are setting ourselves for another financial crash in the future, another bubble that will burst.
As I said at the begginning, I will write as often as possible about everything going on in the financial world. For now, my only comment for you is avoid selling your stock holdings at these levels, and if you have money on the sidelines, put it to work on the stock market or the Corporate Bond markets in well known companies with a clear line of business. Avoid airlines, financials, and automobiles for now.
Until next time,
JCM
I hope people find this information helpful and will come back to read about my thaughts and analysis.
As the moment of this writing, the Dow Jones is 400 points down, it started 700 points down and then recovered, and we will see where it goes from here. We are in the middle of a financial crash that will be remember for years from now. We will remember how much money we lost (individually and as a country), we will remember the firms that dissapeared already and the ones that will dissapear in the near future. But we won't remember what brought us to this point and which laws and changes from Washington made all this mess possible. By not remembering how we got to this point, we are setting ourselves for another financial crash in the future, another bubble that will burst.
As I said at the begginning, I will write as often as possible about everything going on in the financial world. For now, my only comment for you is avoid selling your stock holdings at these levels, and if you have money on the sidelines, put it to work on the stock market or the Corporate Bond markets in well known companies with a clear line of business. Avoid airlines, financials, and automobiles for now.
Until next time,
JCM
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