Success Equals Opportunity & Preparedness… how prepared are you? Continued…

Posted by George Mihos
October 27, 2008

ALWAYS REMEMBER THIS - What are the TWO most influential states in HUMAN BEHAVIOUR…FEAR & GREED!!!  below is an extract from an email I received… and before I go on once again, I’m not offering financial advice; you should always get qualified professional advice when making financial decisions. What I am doing is letting you know what has worked for me and giving you the opportunity to check it out for yourself. This message is intended to provide general news and information only. Readers should rely on their own enquiries before making any decisions regarding their own interests. Please do not rely on any part of this message as a substitute for specific legal or financial advice. All material is copyright 2008 

Recent events surrounding Investment Banks in the

US have lead to a roller coaster ride for share markets.  We take a detailed look at what has happened, cutting through the sensationalised reporting that has occurred through the media in recent weeks; Following this theme, the man many regard as the world’s greatest ever investor, Warren Buffet, recently made headlines when he took a stake in investment bank, Goldman Sachs.  We have taken extracts from a recent interview he gave which takes a look at his thoughts on the recent turmoil; and The recent credit crunch and share market turmoil took another turn this week following recent bank failures and the subsequent rescue from the

US and European Governments. The uncertainty regarding the future movement of these rescue plans has lead to massive daily swings in share markets around the world. The Australian Share market has seen 17 days where the market has moved by 1% or more. This is above historical norms. 

The US economic rescue package and other policy moves - There is no doubt that this crisis has become worse than many experienced investors and economic commentators had anticipated. Following the threat to the broader world economy posed by these problems, it was clear a comprehensive solution was needed, hence the US Government’s relief program. By removing bad debts from the banking system, the Government should go a long way to providing confidence for banks to deal with each other again. This injection of capital by the Government should go a long way to removing the risk of a financial meltdown and the possibility of a drawn out economic slump.Beyond the US Government’s moves, banking authorities around the world are dealing quickly with these problems by expanding access to liquidity, providing loans to troubled banks and in some cases guaranteeing them. This is very different from the 1930’s when 5000 US banks failed, taking their depositors savings with them and driving the US deep into recession.
What to Expect in the Next Year from Shares - It would be nothing but stating the obvious to say the short term in world share markets should be quite volatile.  Whilst successful approval by the US Government of the rescue plan is positive for markets, it won’t do anything to prevent the slow down of the global economy.  The likelihood of more bad economic news indicates further short term weakness is possible. While the short term outlook is unclear, it is worth noting that the fall in shares from their highs is now in line with post 1960 bear markets. The tables below outline these falls and how quickly markets have recovered.Bear markets in US shares since 1960

Share bear
market in US
shares		 Months to low % Fall Months after
low to make
new high		 % gain in first
12 months after low
 Aug 59 - Oct 60 14 -13.9 3 +5
 Dec 61 - Jun 62 6 -28 15 +33
 Feb 66 - Oct 66 8 -22.2 6 +33
 Nov 68 - May 70 18 -36.1 22 +37
 Jan 73 - Oct 74 21 -48.2 69 +38
 Nov 80 - Aug 82 21 -27.1 3 +58
 Aug 87 - Dec 87 4 -33.5 19 +23
 Mar 00 - Oct 02 31 -49.1 55 +34
 Average 15 -32 24 +33
 Oct 07 - ? 12? -29 ? ?

Source:  Bloomberg, AMP Capital Investors

Bear markets in Australian shares since 1960

Share bear
market in Aust
shares		 Months to low % Fall Months after
low to make
new high		 % gain in first
12 months after low
 Sep 60 - Nov 60 2 -23.2 33 +12
 Feb 64 - Jun 65 16 -20.4 25 +9
 Jan 70 - Nov 71 22 -39 94 +52
 Jan 73 - Sep 74 20 -59.3 59 +51
 Nov 80 - Jul 82 32 -40.6 17 +39
 Sep 87 - Nov 87 2 -50.1 75 +35
 Aug 89 - Jan 91 15 -32.4 30 +39
 Feb 94 - Feb 95 12 -21.7 20 +25
 Mar 02 - Mar 03 12 -22.3 15 +27
 Average 15 -34 41 +32
 Nov 07 - ? 11? -33? ? ?

Source:  Bloomberg, AMP Capital Investors

Conclusions - In two words – DON’T PANIC. The well known advocate of value investing, Benjamin Graham, coined the term “Mr. Market” (in 1949) as a metaphor to explain the share market. Sometimes Mr. Market sets sensible prices based on economic and business developments. At other times he is emotionally unstable, swinging from years of euphoria to years of pessimism. But not only is Mr. Market highly unstable, he is also highly seductive – sucking investors in during the good times with dreams of riches and spitting them out during bad times when all hope seems lost. Over time share markets are driven by economic and business fundamentals.As Warren Buffet once observed “Be fearful when others are greedy and greedy only when others are fearful”. This perhaps explains why he is now buying into Investment Bank Goldman Sachs even though investor fear is running high, more on that below. 

An Interview with Warren Buffet - Most of you would know the name Warren Buffet. The man is synonymous with share market investing and was recently named

America’s second richest man with an estimated fortune of $46 Billion dollars. Recently Buffet gave an interview to CNBC following his surprise investment of $5 billion dollars in Goldman Sachs. We have taken a look at some of the highlights below which provide a fantastic insight into how he interprets the recent crisis in financial markets in the

US.Interviewer:  Does the backdrop of the Federal government potentially getting involved with the massive bailout plan for Wall Street have anything to do with this deal?Buffet:  Well I would say this, if I didn’t think the government was going to act, I would not be doing anything this week.  I might be trying to undo things this week.  I am, to some extent, betting on the fact that the government will do the rational thing here and act promptly.  It would be a mistake to be buying anything now if the government was going to walk away from the Paulson proposal.Interviewer: 

Warren, you mentioned Wall Street could not have taken another week like that.  But what does that mean to the American taxpayer who’s sitting at home saying, “why is this my problem?”

Buffet:  Yeah well, it’s everyone’s problem.  Unfortunately, the economy is a little like a bathtub.  You can’t have cold water in the front and hot water in the back.  And what was happening on Wall Street was going to immerse that bathtub very, very quickly in terms of business.  Look, right now business is having trouble throughout the economy.  But a collapse of the kind of institutions that were threatened last week, and their inability to fund, would have caused industry, retail and everything else to grind to something close to a halt.Interviewer:  New York Mayor Mike Bloomberg said this morning that we should not be giving a blank cheque to have something passed in the dead of night.  How dire is the situation?Buffet: There are times when events force timetables on you and force action. In the end if somebody offers something that makes sense, I better decide whether to act or not. It would be nice to have the luxury of thinking about this for three months. But I will tell you, if you think about this proposal for three months you’re going to be facing a situation that’s far different, and far more difficult than if you do something now.   The Commonwealth Government Emergency Package - The Australian Government has announced it will introduce a $10.4 billion emergency fiscal stimulus package in response to the worsening global credit crisis.

By adopting this multi strategy approach, the government has ensured that the programme will have an immediate impact.  Consumer spending (currently the weakest part of the economy) will receive some very significant support in the lead up to Christmas.  By bringing forward the infrastructure spending and increasing support for first home buyers, it raises the prospect that construction activity may start to pick up.The Australian dollar has fallen considerably in recent months, delivering a big competitive boost to exporters and import-competing firms.  We have also experienced a cut in interest rates, with more looking likely.There are still some difficult times ahead for the economy, however, the strategies above may be provide some light at the end of the tunnel.  

Yours with Ethics and Passion  George Mihos

Melbourne Australia, October 27, 2008     

Once again, I’m not offering financial advice; you should always get qualified professional advice when making financial decisions. What I am doing is letting you know what has worked for me and giving you the opportunity to check it out for yourself. This message is intended to provide general news and information only. Readers should rely on their own enquiries before making any decisions regarding their own interests. Please do not rely on any part of this message as a substitute for specific legal or financial advice. All material is copyright 2008 

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