The Credit Crunch
As the credit crunch continues, the Fed keeps adding liquidity to the financial system. However, as quoted in The Wall Street Journal, Bob Eisenbeis, chief monetary economist for Cumberland Advisers, said it’s no longer an issue of liquidity that’s plaguing the markets, “Rather, there is uncertainty about the underlying quality of assets – which is a solvency issue, driven by a breakdown in highly leveraged positions.”
This “breakdown in highly leveraged positions” initially stemmed from rising defaults in subprime mortgages. That cascaded into other areas of the financial system and is now reaching into areas that, heretofore, were considered “safe.” The meltdown of Bear Stearns also suggests that we’re moving from a financial crisis to a crisis of confidence. When clients and lenders lose confidence in a firm’s abilities to meet its financial obligations, they can pull the plug quickly.
While that may sound rather dire, we need to keep in mind that for the prepared investor, fear may breed opportunity. As nervous investors throw in the towel, seasoned investors with a broad perspective and intestinal fortitude may profit from the tumult. Sir John Templeton, considered by many to be one of the greatest investors of the 20th century, said, “The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell." That contrarian thinking enabled him to build a highly successful investment management company that he eventually sold in 1992 for nearly $1 billion.
Of course, nobody rings a bell and says, “Hear ye, hear ye, now is the time of maximum pessimism so back up the truck and start buying.” The chances of identifying the bottom of the market and jumping in at that exact moment are slim to none. However, being a successful investor does not require perfect timing. It requires a strategy of buying low and selling high.
Interestingly, when it comes to the financial markets, many investors do just the opposite. They want to sell their securities when prices are relatively low (e.g., 2002 and 2003) and then, buy securities when times are euphoric and prices are historically high (e.g., 1999 and early 2000). That’s a recipe for whiplash and poor returns.
The current “confidence breakdown” may eventually lead to a great buying opportunity. As your advisor, we continue to do what we think is best for our clients based on our experience and based on our clients’ goals, objectives, and risk tolerance.
This “breakdown in highly leveraged positions” initially stemmed from rising defaults in subprime mortgages. That cascaded into other areas of the financial system and is now reaching into areas that, heretofore, were considered “safe.” The meltdown of Bear Stearns also suggests that we’re moving from a financial crisis to a crisis of confidence. When clients and lenders lose confidence in a firm’s abilities to meet its financial obligations, they can pull the plug quickly.
While that may sound rather dire, we need to keep in mind that for the prepared investor, fear may breed opportunity. As nervous investors throw in the towel, seasoned investors with a broad perspective and intestinal fortitude may profit from the tumult. Sir John Templeton, considered by many to be one of the greatest investors of the 20th century, said, “The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell." That contrarian thinking enabled him to build a highly successful investment management company that he eventually sold in 1992 for nearly $1 billion.
Of course, nobody rings a bell and says, “Hear ye, hear ye, now is the time of maximum pessimism so back up the truck and start buying.” The chances of identifying the bottom of the market and jumping in at that exact moment are slim to none. However, being a successful investor does not require perfect timing. It requires a strategy of buying low and selling high.
Interestingly, when it comes to the financial markets, many investors do just the opposite. They want to sell their securities when prices are relatively low (e.g., 2002 and 2003) and then, buy securities when times are euphoric and prices are historically high (e.g., 1999 and early 2000). That’s a recipe for whiplash and poor returns.
The current “confidence breakdown” may eventually lead to a great buying opportunity. As your advisor, we continue to do what we think is best for our clients based on our experience and based on our clients’ goals, objectives, and risk tolerance.
posted by Triton Wealth Management at
12:40 PM
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