Tuesday, September 30, 2008

The Greatest Stock Market Wisdom I Have Ever Heard!

It is an understatement to say that the stock market did not like the defeat of the bank rescue plan yesterday. No matter what your politics are, the defeat signaled to the financial markets that politicians are every bit as greedy as the Wall Street types they condemn. The election polls said the American people were against bailing out the banks, and a majority of politicians from both sides of the aisle, gave the people what they wanted. The only problem was that they did not give the country what it needed, which was a plan to unlock the banking system. You can talk all you want about bailouts or rescues, but the truth of the matter is a bank near you will be biting the dust in the near future if there is no plan forthcoming. In this regard, it is my understanding that the Senate is working on a plan. Let's hope they are more successful at formulating something that does the job. I have been through a lot of market turmoil in the 33 years I have been in the business, but the single most powerful wisdom I have ever heard in how to deal with bad markets came during the height of the 1987 crash. On that day, as you know, the market was down nearly 23% and people were just swept away with panic. Almost unbelievably, I got almost as many calls from non-clients as I did from clients asking what to do. Since everyone knew, even by mid morning, that the sell off was going to be unlike anything we had ever seen, there was some disagreement among the investment professionals at the firm I worked with at the time about what we should do. Cut bait, or ride it out, those were the choices on the table, and cut bait sure felt better than riding it out because we all knew that it was going to get a lot worse before it got better. A very successful elderly client strolled in on his way to lunch and announced to our huddled little group, "What are we buying boys?" We were all a bit taken aback because we were certainly not thinking about buying. Then he said something that I will never forget. He said, "You know, when you think about what is a safe place to put your money in times like these you have to remember one thing: If the greatest companies in the world are not worth anything, then nothing else is. I'm not talking about this little company or that one. I'm talking here about the great blue chip stocks. If they have survived for 50 years or more and have risen to leadership in their industries, it is not an accident. They know how to survive and prosper. They know how to make it through wars, recessions, oil embargoes, market corrections, and politicians of both stripes. They know how to adapt and change and remake themselves over and over. They know how to get close and stay close to their customers. They will survive this crisis and they will be stronger on the other side of it because they will not hide; they will use this great uncertainty to gain market share. You watch, a year from now; five years from now the great blue chip stocks will be higher, a lot higher." The man's words were echoed almost verbatim when I received a call from a very successful lady a few minutes later. She wanted to know what to buy. She had a substantial sum of money that she wanted to put in the market and wanted me to tell her what to buy. I tried to caution her, but she stopped me and said, "Look, Greg, I'm a big girl. I know the risks, but my husband and I have amassed thousands of acres of farm ground, and we did it by buying every time other people were afraid that farm ground was going down the tubes. Great companies are like great farm ground. They always come back and they always rise to the top. Stock traders don't know what they are buying and selling. They are just like commodity traders in that regard. They are not dealing in something that in their minds has true value. They are just selling prices, and the prices are falling, so they want to sell. Next week the prices will be rising ,and the traders will be right back in line trying to buy the very thing they sold last week. I'm not buying prices when I buy farm ground, I'm buying something that I know what to do with. The same goes for the great companies. They are not just prices; they make something that's valuable. They'll come out of this bad time, and I'm going to make a lot of money when they do." Neither of these people went to Harvard or Yale. Neither even had a college education, but both had amassed fortunes, and they knew exactly how they had done it: Go where others fear to tread. But stick with the best, because the best will survive and by surviving they will prosper you. The next few days and weeks will be volatile, but just remember the high-quality dividend paying companies that we own make products that we use everyday. One or two might run into trouble but in a portfolio of thirty stocks there will ultimately be a lot more winners than losers a year from now.