Thursday, September 25, 2008

US Congress Bails our Canadaian Investors [Yeah, sure...]

US Congress bails out Canadians’ RRSPs. [Yeah, sure…]

No one loses money because of what they know: what hurts them is what they don’t know. Doesn’t this seem like a perfectly logical statement?

This is the sequence of events that illustrates what you and the experts don’t know:
Summer 2007. The stock market sold off sharply from mid July to mid August. The news related to the U.S. subprime mortgage fiasco and the downturn is U.S. home prices.
January 2008. The stock market sold off sharply as we learned that the problem was much worse than we had thought. Many non-U.S. banks were holding billions of dollars of investments backed by worthless morgages.
March 2008. The stock market sold off sharply again. The mortgage/real estate problem was so bad that a major brokerage firm had failed.
July 2008. The stock market sold off sharply again. The situation was worse than they thought: two huge U.S. mortgage corporations had failed and needed the government to bail them out.
September 2008. The stock market sold off sharply again. The problem is so bad that one more giant brokerage firm failed and another had to be bought out. And now the U.S. government is contemplating backing hundreds of billions of dollars of these junk-mortgage-backed investments.

Do you see the pattern? It’s not about what they know, it’s about what they don’t know. And every time the experts learn more about the unknown numbers in this mysterious mortgage-monster problem, the stock market goes lower.

Our assumption was that we only lose where we don’t know. But it’s not true, is it?

We DO know that the US junk-mortgage problem is worse than they thought. We DO know that US house prices are in a tail spin. We DO know that the stock market has gone lower and lower every time some new financial crisis surfaces. Yet, in the face of all these “knowns,” we continue to hold onto our stock portfolios. And we continue to lose. Why is this?

The reason most investors and their advisors continue to hold on to their losing positions is not logical, it’s emotional. It’s financial shell shock.

Our expectation is that our investments should go up in value: but this past year has not delivered on our expectation. And now, investors and their advisors are in shock, frozen in inaction. In full knowledge that the U.S. government is required to bail out the U.S. financial system, they remain frozen. And every month it’s getting worse. Fear and dissapointment have replaced logic.

How can we protect ourselves from further loss? We simply sell our stocks. We stop relying on the U.S. government to bail us out: we bail ourselves out. Then we can stay frozen in disbelief without losing any more money in our RRSPs.

2 comments:

chrispycrunch said...

Well-said, Ken. What message is the US Govt sending the capital markets? I-Bankers failed, so we'll bail you out and you can keep your bonuses, whilst the common folk get layoff notices?

I'm really disillusioned: I believe in value investing and buy-and-hold but in this environment such a strategy is foolish. It's a trader's market.

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