Which Are You? A pessimist might argue that our current economic situation is permanent because we have lost our position as the number one nation in the world. An optimist might argue that American work ethic and ingenuity will keep us at the forefront and an eventual rebound is inevitable. Both optimists and pessimists can be stupid at times but the optimist will be happier and more successful most of the time. I have been reading a book by Martin Seligman called Learned Optimism. Dr. Seligman is a prominent psychologist who discovered that individuals learn to be helpless when they reach the conclusion that, whatever their behavior patterns, they cannot improve their situation. If they persist in this state, they are prone to long bouts of depression, poor health, and a reduced life expectancy. Much of the book goes on to describe how we can reverse our helplessness and restore our optimism. I have argued that, since no one can predict, with any degree of accuracy, the future investment environment, the next best quality you can have is resilience, the ability to keep going after a setback. The more optimistic we are, the more likely we are to persist.
We Have Undoubtedly Had A Setback. We no longer have money we thought we had. Now what we have to decide is what to do with the assets we still have. Here are a few strategies that come to mind. 1. Get out of the financial markets and stay out. This strategy works for a number of my friends and family. The key here is to have an adequate income to meet your needs without having to rely on investment income. 2. Get out of the financial markets and get back in when the environment improves. If this is your strategy, I'm afraid I can't help you. Knowing when to get back in is critical. Past recoveries show that a third of what has been lost is recovered within 40 days of the turnaround. Like I've said before, I've known several market timing specialists over the years. None are still practicing. 3. Change to a less aggressive strategy emphasizing safety. This is what I've attempted to do in most cases; however, it has been only moderately successful. An investment with perceived safety can drop in price right along with those considered more aggressive. The best you can hope for is that it won't drop as much. I will continue to utilize this strategy while looking for opportunities that may arise. One area of interest is some of the beaten down financial stocks. As an example, I recently added shares of a stock that is selling for only $2.75. It currently pays a dividend of $1.24 per year or a yield of 45.09%. The book value of the company is more than $10 per share. What are the odds of that dividend continuing? I don't have a clue but if I can buy $10 in book value and get back 11.27% of my investment in three months, there has to be more upside than downside. The most I can lose is $2.75 per share. Bank of America can drop that much in a flash. If the market decides the company is worth its book value, I stand to make 7.25 a share. Worth taking a flyer? It is to me.
Notice How Few People Are Talking Energy Prices These Days. The price of a barrel of oil has dropped 51.02% since June of this year when I told you prices had to come down for the right reasons or the wrong ones. Remember, the wrong reason was a worldwide recession? Here it is folks. It is likely the price will drop further unless some miracle occurs to erase the pending recession. Hopefully, we won't ignore our long term need to find new energy both from renewable and non-renewable resources. We also need to conserve, which I suppose we will do automatically because we have less money to spend.
It's Getting Chilly Here In Colorado. I suppose that means this old snowbird needs to get ready to fly. Don't hesitate to call if you need to get in touch before I leave. I anticipate spending more time here in 2009. Hope to continue working with you whether I am here or in Texas.
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