Began Buying In The Crisis

My call over the weekend to start buying brought a flood of email. I’ll respond to the most common points.

You really don’t grasp how severe this financial crisis is. You and other so-called experts need to wake up to what we’re facing here and stop telling people to buy cheap stocks on their way to worthless. Did you notice what Bear Stearns went for?

What, you thought buying opportunities came with happy headlines? I agree with Warren Buffett that we should be greedy when others are fearful and fearful when others are greedy. There’s a lot of fear on the street these days.

I grasp how severe the crisis is, and I also grasp two other key points: (1) the bad news has been more than sufficiently reported, which is why everybody gets angry when I suggest buying and, (2) cheap is cheap even in a bear market because short-term bear market rallies are among the stock market’s most profitable events. My analysis tells me that building positions at current prices will pay off. I don’t know how long I’ll hold and I don’t care right now. I’m staring across a different bridge at the moment.

Finally, yes, I did notice what Bear Stearns went for. I wish I’d been quicker on the phone. I would have paid $2.25 per share for the whole company.

I know I’m supposed to subscribe to your letter to find out your specific buy targets, but could you at least reward a loyal site visitor with a hint as to how you’re approaching the financial sector, if at all?

Anytime a sector is as much under the gun as financials are now, it’s wiser to buy the basket of stocks instead of a single company stock for precisely the risk that was shown in neon lights last weekend with Bear Stearns. Groups of 100 stocks don’t go bankrupt. I suggest using an ETF or mutual fund that focuses on the financial sector. The Kelly Letter bought one yesterday.

Do you think the rate cuts will ever help?

Absolutely. Doubts about the Federal Reserve’s power are common near the end of a rate cutting cycle when the economy is still disgorging bad news and the stock market has yet to show a hint of recovery. Pay no attention. Rate cuts always take a while to soak in, that lag time is always when critics show up in droves, then the rate cuts start working and the critics fade away. The biggest smiles belong to those who had the courage to buy before the good news began.

Is it too late to buy gold?

Yes. The liquidity created by the Fed’s rate reduction campaign will probably begin drying up sometime after summer. It’s that accomodative policy that has been the jet fuel behind gold ever since the tech bubble burst. Don’t chase yesterday’s great contrarian call. Find today’s.

Is it too late to buy yen?

Just about. Here in Japan, economists are saying 80 yen will be the bottom for the dollar. I doubt it will go that low, but I think 90 is a good bet. We’re at 97 now. It might be worth the trouble to buy some yen quickly to catch the last gasp, but I’d rather just look at ways to buy the cheap dollar as it forms a bottom.

In general, it’s better to avoid buying what today’s headlines say to buy. Current headlines are banging you over the head with these messages:

  • Stocks are awful
  • The dollar is awful
  • Real estate is awful
  • Gold is great
  • Oil is great
  • Foreign currencies are great

These will flip around in the future, so positioning money accordingly is a fine idea. So fine, in fact, that I’m doing it.

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