What it Feels Like to Buy Low

As an investment advisor, I sense things are getting really bad out there, maybe even approaching market bottoms, or so-called “capitulation,” when long-time clients who have never been bothered by the vagaries of the equity markets begin calling me looking for “good news.”

How about you? How are you handling the extreme market volatility we have experienced last year? Are you beginning to believe that fear and doom and gloom are justified or that we are approaching, what I heard one TV reporter say, “the end of the world as we know it?” If so, you are not alone.

But maybe this is what it feels like to buy low.

What time can do

Suppose last July you and I were discussing the five-year bull market, and in the course of our discussion we verbally espoused that old fundamental truth: “Buy low, sell high.” We would have agreed instantly, and with barely an afterthought rambled along on other investment matters.

Now, let’s have that same conversation today when you may be at the point of bailing out of your equity positions (or you have already bailed), down 45.8% since Oct. 9, 2007 (according to BTN Research) and dropping further. Maybe you are even thinking about stopping your 401(k) or 403(b) payroll contributions to “wait until things clear up.” Yes, you tell yourself, “It is different this time, not even close to the prior nine recessions we have had since 1957.”

A matter of perspective

Graph indicating stock market drop
©2009 iStock International Inc. /fpm

“Buy low, sell high.” Let me ask: If that was unabashedly true last July, why isn’t it even truer today? Last year, we were not confronted with the highly emotional roller coaster we find ourselves on today — that’s why. Oh, yes, this time it is different — no recovery in sight. We had no doom-and-gloom ball and chain last year but we do now.

Let me suggest to you that the “low” is staring us in the face. It is maybe not the lowest of the low but more likely closer to the bottom than to the top. The S&P 500 Index has plunged more than 45% from its high Oct. 9, 2007, according to BTN Research. Could it go lower? Yes, of course, and maybe it will, but I contend that “this is what it feels like to buy low.”

Warren Buffett said it right when he warned, “Be fearful when others are greedy, but be greedy when others are fearful.” I say, “The only people who get hurt on roller coasters are the jumpers.” But look at those headlines. The “experts” are saying things like:

  • “Can your bank stay afloat?” — U.S. News, Nov. 12, 1990.
  • “Uncertainty rains for the U.S. economy.” — Wall Street Journal, Dec. 3, 1990.
  • “How the real estate crash threatens financial institutions.” — U.S. News, Dec. 16, 1990.
  • “The real estate bust.” — Newsweek, Oct. 1, 1990.
  • “Housing recession that began in the Northeast three years ago now engulfs entire nation.” — New York Times, Dec. 16, 1990.

Repeat history

Turn off Jim Cramer and take a ride in the country fueled by gasoline (predicted by the experts to be $5.00/gallon) that is now selling below $2.00 a gallon.

But it is different this time. Is it really? Granted, there are certainly unique facts and circumstances to this market decline and recession that make it appear different on the surface. But as I was researching data for the chapter in my upcoming book for physicians, I reread Peter Lynch’s book about the renowned Magellan Fund. In it, he itemizes some of the more pessimistic headlines of 1990, five of which I cited above. Yes, 1990. Back then it was the S&L crisis when banks closed by the hundreds; the First Gulf War had no guarantee of success; the country mired in seemingly endless recession; and the equity markets roiled by all of the uncertainty we were facing. All of these were “different from anything else we had ever experienced before,” it appeared. “We know markets recover in time, but not now, because it is different this time,” people said.

However, Lynch summed up what happened following the months of doom-and-gloom media summarized by a headline in Barron’s: “Suspense and dread cast a heavy pall over the markets.” To quote Lynch, “Of course we now know the war wasn’t as terrible as some had expected … and what we got from the stock market instead of a 33% drop was a 30% gain in the S&P 500 average, a 25% gain in the Dow and a 60% gain in smaller stocks. You would have missed it if you paid the slightest attention to our celebrated prognostications.”

Yes, it was just as different then as it is right now. My suggestion — turn off Jim Cramer and take a ride in the country fueled by gasoline (predicted by the experts to be $5.00/gallon) that is now selling below $2.00 a gallon.

Send me an e-mail and I’ll send you a piece that will help you understand the need to keep a long-term perspective in these volatile times.

Kenneth W. Rudzinski, CFP, CRCP, CLU, ChFC, CASL, CAP, is a registered representative of the Lincoln Financial Advisors Corp., a Broker/Dealer (Member SIPC) and Registered Investment Advisor. Insurance is offered through Lincoln affiliates and other fine companies. He can be reached via mail at 2036 Foulk Rd. Suite 104, Wilmington, DE 19810, by telephone at (302) 529-1320 or through e-mail at Kenneth.rudzinski@lfg.com.

The content of this letter was provided to you by Lincoln Financial Advisors Corp. for its representatives and their clients.

This letter represents an assessment of the market environment at a specific point in time and is not intended to be a forecast of future events or a guarantee of future results. This letter may include forward-looking statements that are subject to certain risks and uncertainties. Actual results, performance or achievements may differ materially from those expressed or implied in the forward-looking statements. Risks or uncertainties that could cause or contribute to such material differences include but are not limited to general economic conditions; interest rate environment; competitive conditions in the financial services industry; changes in law, governmental policies and regulation; and rapidly changing technology affecting financial services. Market conditions are subject to change, and past performance is not a guarantee of future results. This letter does not constitute a recommendation to buy or sell any specific security. CRN200811-2023513.

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