Ponzi Pyramids
Bernie Madoff hit the headlines earlier this year as possibly the biggest stock market scam artist of all time. A few weeks later, Canada allegedly discovered her own mini-version of a Ponzi scheme.
What possesses a person to indulge in a Ponzi Pyramid? I wonder what kind of mind enters the Ponzi Pyramid business.
Exactly what is a Ponzi scheme? How does it work? Why do they do it? Don’t they know they’ll be caught? Are there Ponzi Pyramids where the scammers don’t get caught? Are they crooked from the beginning or do they start honest, and turn crooked?
Recipe for a Ponzi Scam
Let’s pretend we are con artists. We want to steal millions and don’t care who we take it from. We are willing to scam whoever is sucker enough to be scammed. How would we do it?
Step 1: The Victims: who will we steal from?
The easiest people to con have two outstanding characteristic: greed and naïveté. They want to get rich and can be lead to believe that someone other than themselves can make them rich.
Step 2: The Initial Con: it’s always some variation of the theme: “Trust me.”
The scheme should offer participants an abnormally high return and assurances that their money is safe.
Step 3: The On-going Con: once the victims give their money to the con artist, they have to receive constant assurance that they have, indeed made a lot of money. Each month they should be given the sales pitch all over again. “This is a great investment, you have made a lot of money, and if you keep your money invested, you will make even more.” It is VERY important that the investors/victims be constantly encouraged to keep their money in. After all, it’s the con artist who is supposed to make the money, not the investors.
Step 4: The Sting: the con artist has to actually take money out of the pyramid scheme. Perhaps his payoff will be in the form of a management fee or bonus. Usually it is a performance fee based on the stellar returns the con artist shows people in Step 3. The principle is that the con artist takes the money out and the investor/victims are told to keep their money in.
Step 5: The Pyramid: obviously no con artist is slick enough to convince all the investor/victims to keep all their money in. This means the scheme will have negative cash flow: it has to pay out both the con artists and those few investors lucky enough to sell out of the scheme before it ends. To offset this negative cash flow, the con artists will have to generate positive cash flow. They do this in two different ways: [a] selling the scheme/scam to new investor/victims and [b] actually investing the money and getting a positive return on it.
Step 6: The Get-away: one morning the investor/victims wake up to discover they have lost it all. And the con artist is no where to be seen. The Get-away is the part that the they usually mess up. For some reason, con artists don’t know when to quit. They always seem to want more. They stay with the scam too long – eventually the pyramid scheme has too much negative cash flow and not enough positive. The investor/victims wake up to the fact that there is no money in the scheme, but the con artist has not made his get-away. The jig is up.
The authorities recognize the Ponzi scam by the cash flow: those investor/victims who cash out get the money from the new investor/victims putting new money in. When the exit doors and more crowded than the entrance doors, those who want out can’t get out. They blow the whistle to the authorities and the jig is up.
There’s something missing in this scenario, isn’t there? When Mr. Ponzi master-minded his schemes in the USA about 100 years ago, he knew he was conning people and he actually planned his get-away. As soon as the out flow of money was greater than the in-flow, he shut the pyramid down and vanished with the remaining money. But that’s not what happens in the modern scams. Today’s con artists seem oblivious to the fact that they are con artists. They don’t seem to plan their get-aways. Maybe they actually do think they can make abnormally high investment returns with very little risk. Maybe they actually do make some abnormally huge annual return for a short time. After all, how many ordinary Canadians made 30% or 40% when Canadian oil stocks and gold stocks were red hot? We all know ordinary Canadian investors who did it; maybe these Ponzi operators did it too. Maybe they think they can keep on doing it. And maybe they think they can do it for everyone. They can help everyone make abnormally high returns and, of course, be very well paid for it. Everyone would win! Maybe that’s how it all got started.
Do today’s Ponzi look alikes sincerely think he could earn 30% or 40% annual return on their trading account year after year? Did they set up their business plans thinking they really can make super high returns? If they did, there would be no need for a get-away. The gravy train would go on for ever.
Isn’t it amazing? Is it possible that the Ponzi operators AND the investors share two characteristics: greed and naïveté?
“You ain’t seen nothin’ yet!”
Small time operators that adventure into the dizzy realms of financial mania pale beside the exploits of the American establishment. No, we are not referring to the ill-fated Bernie Madoff. We are referring to the biggest financial fiasco ever to hit America; the sub prime mortgages.
Greed and naiveté? People who could never hope to buy a home could now get 100% financing: now they too could participate in America’s housing boom! Mortgage brokers and realtors who once had to beg the banks to lend more money on a given house now were paid fat commissions and finder’s fees for 100% loans! Syndications were assembling billion dollar deals and selling them to banks all over the world. And with all that new money pouring into real estate, prices were rising steadily. Everyone was winning.
Abnormally high rates of return? Low risk? No problem! 30-year mortgages pay way higher interest than short term paper. This mortgage-backed paper pays out short term interest rates and receives long term mortgage rates. This difference in interest rates is known as “the spread,” and this is where the abnormally high rates of return came from. America’s biggest brokers put deals together for the world’s banking community. And everything was backed by people’s homes, the safest investments in America. Everyone wins.
How did it end? Someone noticed that house prices had stopped rising. Then they noticed that there were increasing numbers of mortgages in arrears. Then they started to doubt that the increasingly dangerous long term mortgages could continue to support the short term paper. Soon no-one wanted the short term paper: the buyers stopped buying and the holders wanted to sell. The jig was up.
Is it a Ponzi scheme that’s bringing the world’s economies to their knees?
Up close and personal.
Is your RRSP a Ponzi scheme? Were you naïve enough to believe that the stock market consistently goes up at about 10% per year? Did you believe that you could make money like Warren Buffet and become rich by the time you retire? All you had to do is buy a portfolio of equity mutual funds and hold them for the long term. Do you trust that your financial planner knows best? …and that your mutual funds are being well-managed? Have you checked the fine print of your mutual funds prospectus to see who gets paid how much for what service? They call it the service fee: is it really ‘the sting?’ Are they trying desperately to keep you invested? …making sure they keep on taking their money out, but you keep your money in?
Even closer
Is your pension plan a Ponzi scheme? Was your pension fund manager naïve enough to think he could achieve a long term rate of return of 8%? Now that the stock portion of your pension plan has a negative 10-year rate of return, are new contributors/investors being asked to increase their contributions so the plan will have enough money to pay you when you retire?
Spooky, isn’t it?
Neo-ponzi
The investment world is more Ponzi-like than we’d like to believe. Wherever we find greedy, naïveté investors and slick profit-driven promoters we have the potential for an inadvertent Neo-ponzi scheme. The original Ponzi was a con artist from the beginning. His intention was to steal people’s money. But today’s Neo-ponzis don’t work that way: there is no malicious intent. They start off operating legitimate investment programs. But greed and naïveté on the part of both investors and operators somehow mysteriously shifts the facts and figures of financial reality into the financial fantasies of a Ponzi pyramid.
In my book, Beyond The Bull*, I point out how important it is for investors to understand how other investors earn their money. The more we know about the action of other participants in the market, the more successful we will be in our own investing. Both outright Ponzi con jobs and today’s Neo-ponzi investments warn us of the same thing: it is important to sell your riskier investments when danger appears in the financial world. Don’t cooperate with those who would have you not sell, but rather hang in through thick and thin.
*http://www.amazon.ca/Beyond-Bull-Taking-Market-Wisdom/dp/0980923182/ref=sr_1_1?ie=UTF8&s=books&qid=1228246016&sr=8-1
Ken Norquay, CMT,
Chief Market Strategist
CastleMoore Inc
ken@castlemoore.com
“Buy, Hold, and Know When to Sell.”
Tuesday, April 7, 2009
Thursday, March 26, 2009
Real Estate Fever!
Real estate fever – really?
We hear you can buy a house in Windsor Ontario for $25,000 to $30,000. We hear that 40% of Windsor’s houses that were sold last month sold for under $100,000. It seems that there is a small part of Canada that has the same depressed house prices as our American cousins. Pierre Elliott Trudeau was right: when the America sneezes, Canada catches a cold. March 2009 sees America suffering from real estate pneumonia and Canadian just now getting the sniffles. Will Torontonians or Calgarians be able to buy houses for under $100,000 some day?
The very thought of such a steep drop in house prices sends chills through the bones of Canadian home owners – especially those with big mortgages. “Yes, it happened in the USA, but it could never happen here. And the Windsor situation is the exception, not the rule!”
In his book, Beyond the Bull, Ken Norquay points out that the human animal uses the most primitive bestial parts of his brain when dealing with money matters. We use our herd instinct to do what everyone else does just when we should be thinking independently. We use our “deer-in-the-headlights” fear instinct to “fight, flight or freeze” when we should be calmly executing our pre-determined investment plan. And now we wonder what instincts homeowners will apply to the current decline in house prices.
So far, Canadian realtors are acting like ostriches with their heads in the sand. They are in denial. “What’s happening south of the border cannot happen here.” And who can blame them? Their job is to help Canadians buy and sell their houses. Realtors do best in rising markets. When house prices go up, they do well. Commissions are good, mortgage brokerage fees are good, and the customers are happy. In times like these, it’s easy to find sellers but more difficult to find buyers. It’s no wonder Canadian realtors don’t want to face the reality of this downturn. They prefer the scramble of speculative activity associated with rising prices.
What about Canadian homeowners? What should they be thinking?
If they were getting a cold, they’d take zinc and vitamin C and get plenty of sleep. But what should you do if you think the price of your house might drop under $100,000? Sell it and rent? Scale down: sell your big house, buy a smaller house? Ride out the storm? What should you do if you are at risk of losing your job and not being able to afford your mortgage payments? Tricky, isn’t it? What is the intelligent thing to do?
For guidance in this question, we encourage you to objectively assess your position as a homeowner and mortgagor. Did you buy a too-big house because you wanted more exposure to a red-hot rising real estate market? Did you take a too-big mortgage because you wanted to leverage your exposure to rising house prices? Now that prices are not going up, are these “too big” decisions still valid? If house prices are going down, maybe you should have a “too small” house. Or maybe you should have only a small mortgage. If the times have changed, we should change with them.
For further guidance, look at the stock market. Most of today’s buy and hold investors have noticed that the 10-year rate of return on equity mutual funds is negative. They are wishing they had sold out 10 years ago. Or even one year ago! But they believed the mutual funds salesman’s line: “Stocks go up over the long term.”
Could that be happening in real estate now?
This is not a good time for speculation in Canadian real estate. Check in with your common sense: are you stretched out in a “too big” real estate situation? What will happen to you if Windsor prices spread to other areas of Canada?
Ken Norquay, CMT
Chief Market Strategist,
CastleMoore Inc
ken@castlemoore.com
We hear you can buy a house in Windsor Ontario for $25,000 to $30,000. We hear that 40% of Windsor’s houses that were sold last month sold for under $100,000. It seems that there is a small part of Canada that has the same depressed house prices as our American cousins. Pierre Elliott Trudeau was right: when the America sneezes, Canada catches a cold. March 2009 sees America suffering from real estate pneumonia and Canadian just now getting the sniffles. Will Torontonians or Calgarians be able to buy houses for under $100,000 some day?
The very thought of such a steep drop in house prices sends chills through the bones of Canadian home owners – especially those with big mortgages. “Yes, it happened in the USA, but it could never happen here. And the Windsor situation is the exception, not the rule!”
In his book, Beyond the Bull, Ken Norquay points out that the human animal uses the most primitive bestial parts of his brain when dealing with money matters. We use our herd instinct to do what everyone else does just when we should be thinking independently. We use our “deer-in-the-headlights” fear instinct to “fight, flight or freeze” when we should be calmly executing our pre-determined investment plan. And now we wonder what instincts homeowners will apply to the current decline in house prices.
So far, Canadian realtors are acting like ostriches with their heads in the sand. They are in denial. “What’s happening south of the border cannot happen here.” And who can blame them? Their job is to help Canadians buy and sell their houses. Realtors do best in rising markets. When house prices go up, they do well. Commissions are good, mortgage brokerage fees are good, and the customers are happy. In times like these, it’s easy to find sellers but more difficult to find buyers. It’s no wonder Canadian realtors don’t want to face the reality of this downturn. They prefer the scramble of speculative activity associated with rising prices.
What about Canadian homeowners? What should they be thinking?
If they were getting a cold, they’d take zinc and vitamin C and get plenty of sleep. But what should you do if you think the price of your house might drop under $100,000? Sell it and rent? Scale down: sell your big house, buy a smaller house? Ride out the storm? What should you do if you are at risk of losing your job and not being able to afford your mortgage payments? Tricky, isn’t it? What is the intelligent thing to do?
For guidance in this question, we encourage you to objectively assess your position as a homeowner and mortgagor. Did you buy a too-big house because you wanted more exposure to a red-hot rising real estate market? Did you take a too-big mortgage because you wanted to leverage your exposure to rising house prices? Now that prices are not going up, are these “too big” decisions still valid? If house prices are going down, maybe you should have a “too small” house. Or maybe you should have only a small mortgage. If the times have changed, we should change with them.
For further guidance, look at the stock market. Most of today’s buy and hold investors have noticed that the 10-year rate of return on equity mutual funds is negative. They are wishing they had sold out 10 years ago. Or even one year ago! But they believed the mutual funds salesman’s line: “Stocks go up over the long term.”
Could that be happening in real estate now?
This is not a good time for speculation in Canadian real estate. Check in with your common sense: are you stretched out in a “too big” real estate situation? What will happen to you if Windsor prices spread to other areas of Canada?
Ken Norquay, CMT
Chief Market Strategist,
CastleMoore Inc
ken@castlemoore.com
Tuesday, March 24, 2009
Suncor/Petro-Can wedding
The “Corporate Efficiency” Racket.
This week two of Canada’s biggest energy companies, Petro-Can and Suncor, announced their engagement. The marriage will occur this autumn. Soon another corporate giant will be born.
And why is this giant merger being undertaken?
They say it’s something about corporate efficiency. Apparently the new giant oil company will be able to lay off thousands of workers and save millions of dollars in expenses. Very efficient.
What an interesting country we live in. Governments are being asked to put up billions of dollars of taxpayer money to prevent the layoff of thousands of auto workers. And now two corporate oil giants have a plan that will likely result in the layoff of thousands of oil patch workers. The Petro-Can/Suncor wedding seems to do the exact opposite of what the government is trying to do in the auto industry.
I wonder what our federal government will do. Will they approve the oil merger and allow the oil companies’ corporate efficiency to neutralize their auto industry bail out? Will they block the merger and receive criticism from corporate Canada for preventing the corporate IN-efficiency that got GM, Chrysler and Ford into the jam they are currently in? Will they attach strings to the deal: approve the merger only if the new merged company agrees to cooperate with the government’s goal of maintaining high levels of employment in Canada? (After all, they are attaching conditions to the auto bail out: the bail out loans will be subject to certain production guarantees etc.) What will our government do?
If they do nothing about the auto industry, hundreds of manufacturing jobs will be lost. If they do nothing about the oil merger, hundreds of energy jobs will be lost. Corporate efficiency is a tough game. It seems that efficiency means running lean and mean: maximum corporate output for minimum labour cost. Isn’t that how the Japanese and German car companies operate? If our government bails out the American car companies, they will be promoting corporate IN-efficiency. Maybe we are asking the wrong question. Maybe the government shouldn’t DO anything. Maybe it’s more important for them to NOT DO.
Ken Norquay, CMT
Chief Investment Strategist
CastleMoore Inc
905-847-8511
This week two of Canada’s biggest energy companies, Petro-Can and Suncor, announced their engagement. The marriage will occur this autumn. Soon another corporate giant will be born.
And why is this giant merger being undertaken?
They say it’s something about corporate efficiency. Apparently the new giant oil company will be able to lay off thousands of workers and save millions of dollars in expenses. Very efficient.
What an interesting country we live in. Governments are being asked to put up billions of dollars of taxpayer money to prevent the layoff of thousands of auto workers. And now two corporate oil giants have a plan that will likely result in the layoff of thousands of oil patch workers. The Petro-Can/Suncor wedding seems to do the exact opposite of what the government is trying to do in the auto industry.
I wonder what our federal government will do. Will they approve the oil merger and allow the oil companies’ corporate efficiency to neutralize their auto industry bail out? Will they block the merger and receive criticism from corporate Canada for preventing the corporate IN-efficiency that got GM, Chrysler and Ford into the jam they are currently in? Will they attach strings to the deal: approve the merger only if the new merged company agrees to cooperate with the government’s goal of maintaining high levels of employment in Canada? (After all, they are attaching conditions to the auto bail out: the bail out loans will be subject to certain production guarantees etc.) What will our government do?
If they do nothing about the auto industry, hundreds of manufacturing jobs will be lost. If they do nothing about the oil merger, hundreds of energy jobs will be lost. Corporate efficiency is a tough game. It seems that efficiency means running lean and mean: maximum corporate output for minimum labour cost. Isn’t that how the Japanese and German car companies operate? If our government bails out the American car companies, they will be promoting corporate IN-efficiency. Maybe we are asking the wrong question. Maybe the government shouldn’t DO anything. Maybe it’s more important for them to NOT DO.
Ken Norquay, CMT
Chief Investment Strategist
CastleMoore Inc
905-847-8511
Monday, March 9, 2009
Scale and perspective: March 9, 2008
It was only a few years ago that Royal Bank was Canada’s biggest corporation and, for the first time in its history, had earnings of one billion dollars in one calendar quarter. It was a red letter day for a big well managed Canadian company.
Last year General Motors lost $31 billion US. There once was a time when GM was the biggest company in the world. Now they are talking bankruptcy and bail out. Makes Royal Bank’s one billion look small.
Earlier this month, AIG, recently the world’s biggest insurance company, announce a quarterly loss of $67 billion US. Makes GM’s loss look small.
Sometimes we can be mesmerized by big numbers: a billion here, a billion there. We can become numbed the sheer size of these accounting facts and figures.
Do not be numb to this fact: America’s giants are going down. There’s no doubt about that. In the early 1990s Soviet communism fell: now it appears that American capitalism is falling. America’s biggest and best are coming down.
We feel sorry for new US president Obama: what a job he has! In fact, we feel sorry of all heads of state in this global financial fiasco. But, at least they are all trying to do the right thing. They are trying to ease the problem by intervening, by offering help when help is needed. They are trying to reduce the risk in their economies.
We are concerned that today’s financial planners are not acting in the same manner. Governments all over the world are trying to bail out the big corporations. But financial planners are not trying to bail out their clients. It costs taxpayers billions to bail out big companies, but it costs the financial planners nothing to save their clients. All financial planners have to do is recommend that their clients sell their stock-based mutual funds and switch to money market or bond mutual funds. It’s that easy. Then, no matter what goes wrong in America, their clients’ investments will survive.
Last week CastleMoore sold out its small position in the stock market. It was easy. They noticed that the US stock market had dropped to a new low and they sold their clients out of the stock market. Why did they sell? Are they trying to ace the market and “time” every tick and bop of the stock market? No, not at all.
CastleMoore is an investment counsellor that manages people’s life savings. And right now the danger level of the stock market has increased beyond their level of tolerance. Why would they expose ordinary investors to that much risk?
Do they hate the stock market? No. They just don’t want to invest in it at this time. They will buy back once there is evidence that the down trend is over.
Why don’t financial planners do the same thing? Just because Blue Chip America is coming undone, there is no reason for ordinary Canadian investors to come undone. There is no need for our savings and investments to evaporate like American capitalism.
It was only a few years ago that Royal Bank was Canada’s biggest corporation and, for the first time in its history, had earnings of one billion dollars in one calendar quarter. It was a red letter day for a big well managed Canadian company.
Last year General Motors lost $31 billion US. There once was a time when GM was the biggest company in the world. Now they are talking bankruptcy and bail out. Makes Royal Bank’s one billion look small.
Earlier this month, AIG, recently the world’s biggest insurance company, announce a quarterly loss of $67 billion US. Makes GM’s loss look small.
Sometimes we can be mesmerized by big numbers: a billion here, a billion there. We can become numbed the sheer size of these accounting facts and figures.
Do not be numb to this fact: America’s giants are going down. There’s no doubt about that. In the early 1990s Soviet communism fell: now it appears that American capitalism is falling. America’s biggest and best are coming down.
We feel sorry for new US president Obama: what a job he has! In fact, we feel sorry of all heads of state in this global financial fiasco. But, at least they are all trying to do the right thing. They are trying to ease the problem by intervening, by offering help when help is needed. They are trying to reduce the risk in their economies.
We are concerned that today’s financial planners are not acting in the same manner. Governments all over the world are trying to bail out the big corporations. But financial planners are not trying to bail out their clients. It costs taxpayers billions to bail out big companies, but it costs the financial planners nothing to save their clients. All financial planners have to do is recommend that their clients sell their stock-based mutual funds and switch to money market or bond mutual funds. It’s that easy. Then, no matter what goes wrong in America, their clients’ investments will survive.
Last week CastleMoore sold out its small position in the stock market. It was easy. They noticed that the US stock market had dropped to a new low and they sold their clients out of the stock market. Why did they sell? Are they trying to ace the market and “time” every tick and bop of the stock market? No, not at all.
CastleMoore is an investment counsellor that manages people’s life savings. And right now the danger level of the stock market has increased beyond their level of tolerance. Why would they expose ordinary investors to that much risk?
Do they hate the stock market? No. They just don’t want to invest in it at this time. They will buy back once there is evidence that the down trend is over.
Why don’t financial planners do the same thing? Just because Blue Chip America is coming undone, there is no reason for ordinary Canadian investors to come undone. There is no need for our savings and investments to evaporate like American capitalism.
Thursday, February 19, 2009
Gold Feb 18,2009.
Gold Feb 18, 2009.
At CastleMoore, we purchased gold a few months ago because we believed it to be in a long term up trend, and had just completed a short term correction within that up trend. The up trend began in 1999 or 2000 and ended last spring when it hit $1000 per ounce. The pull back took gold’s price down to around $700. We bought our current position just under $800.
One of our clients asked us if/when we would add to our position. This was my answer:
“Gold: To add or not to add, that is the question.
We struggled with this question earlier this week [Feb 16]. The conclusion we came to was: do NOT add at this time. And, if gold reverses, up to down, we will sell. We had hoped the up trend that began a few months ago would be a longer term up trend. But, it appears to be running out of steam. Short term momentum has gone parabolic. And sentiment has turned decisively bullish. And the price has reached resistance. This is a bearish combination. It looks like the up trend is almost finished for now.
The most bullish scenario would be for gold’s price to go sideways for 6 months, and then move above $1000. That would be a good reason to buy.”
For readers not schooled in technical analysis, here are a few explanations:
1. ‘Momentum’ is the price of something over time. Technical analysts plot these prices on charts and try to interpret the charts.
2. ‘Going parabolic’ means the rate of price increase is increasing. This shows us that speculators are being attracted to gold. Speculators come in near the end of an up trend.
3. ‘Sentiment’ refers to investors’ attitudes or mood toward the price of gold. Investors tend to be sceptic and negative at the beginnings of an up trend and optimistic and positive at the end.
4. ‘Resistance’ refers to a price at which gold had reversed from up to down in the past. In this case, $1000 was the biggest resistance and $970 was minor resistance.
At CastleMoore, we purchased gold a few months ago because we believed it to be in a long term up trend, and had just completed a short term correction within that up trend. The up trend began in 1999 or 2000 and ended last spring when it hit $1000 per ounce. The pull back took gold’s price down to around $700. We bought our current position just under $800.
One of our clients asked us if/when we would add to our position. This was my answer:
“Gold: To add or not to add, that is the question.
We struggled with this question earlier this week [Feb 16]. The conclusion we came to was: do NOT add at this time. And, if gold reverses, up to down, we will sell. We had hoped the up trend that began a few months ago would be a longer term up trend. But, it appears to be running out of steam. Short term momentum has gone parabolic. And sentiment has turned decisively bullish. And the price has reached resistance. This is a bearish combination. It looks like the up trend is almost finished for now.
The most bullish scenario would be for gold’s price to go sideways for 6 months, and then move above $1000. That would be a good reason to buy.”
For readers not schooled in technical analysis, here are a few explanations:
1. ‘Momentum’ is the price of something over time. Technical analysts plot these prices on charts and try to interpret the charts.
2. ‘Going parabolic’ means the rate of price increase is increasing. This shows us that speculators are being attracted to gold. Speculators come in near the end of an up trend.
3. ‘Sentiment’ refers to investors’ attitudes or mood toward the price of gold. Investors tend to be sceptic and negative at the beginnings of an up trend and optimistic and positive at the end.
4. ‘Resistance’ refers to a price at which gold had reversed from up to down in the past. In this case, $1000 was the biggest resistance and $970 was minor resistance.
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.
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.
Wednesday, September 17, 2008
September selloff ended today [Sept16,08]
September Selloff Ends
For now, it looks like the selling is over, having ended between 2 and 3 o’clock today.
The key occurance was the final flushing of finacial stocks out of the large pension plans and mutual funds. These mega-investors found themselves in an awkward position last year at this time. The summer 2007 selloff came with a warning about subprime mortgage woes: but the mega investors were seriously over invested in bank stocks and mortgages. Their systematic selling program began.
And, this afternoon, those selling programs were mostly completed. The next few days should give us the final verdict: can the stock market move up from here?
Here is an observation on both the Canadian and US markets:
The Facts: The financial news in September was even worse than in July. In July, we were worried that Fannie and Freddie were in trouble. In September they actually had to be bailed out. In July we were worried that Lehman and Merrill were in trouble. In September, one was bought out and the other went under.
The Emotions: In September, investors were more worried than they were in July. Would the US financial system hold up?
The Prices: The financial stock indices held well above their July lows even though Lehman Bros. went bankrupt. In spite of the extra bad news in September, the financial stock indices did not sell off to new lows. And, today, the selling abated and the buying came back. The crisis appears to be over.
There is a divergence between investor emotion and price. That’s what happens at the bottom.
Caveate emptor: this argument is the logic that tells us a short term stock market bottom occurred today: but, in the financial world, anything can happen. Good luck.
For now, it looks like the selling is over, having ended between 2 and 3 o’clock today.
The key occurance was the final flushing of finacial stocks out of the large pension plans and mutual funds. These mega-investors found themselves in an awkward position last year at this time. The summer 2007 selloff came with a warning about subprime mortgage woes: but the mega investors were seriously over invested in bank stocks and mortgages. Their systematic selling program began.
And, this afternoon, those selling programs were mostly completed. The next few days should give us the final verdict: can the stock market move up from here?
Here is an observation on both the Canadian and US markets:
The Facts: The financial news in September was even worse than in July. In July, we were worried that Fannie and Freddie were in trouble. In September they actually had to be bailed out. In July we were worried that Lehman and Merrill were in trouble. In September, one was bought out and the other went under.
The Emotions: In September, investors were more worried than they were in July. Would the US financial system hold up?
The Prices: The financial stock indices held well above their July lows even though Lehman Bros. went bankrupt. In spite of the extra bad news in September, the financial stock indices did not sell off to new lows. And, today, the selling abated and the buying came back. The crisis appears to be over.
There is a divergence between investor emotion and price. That’s what happens at the bottom.
Caveate emptor: this argument is the logic that tells us a short term stock market bottom occurred today: but, in the financial world, anything can happen. Good luck.
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