This is a question that was posed to us. It is being published in ‘It’s Up to You’, the monthly publication of The Kobrin Agency Inc.”
June 18, 2003
Ron, the investment portfolios of many people has literally been decimated by the recent market. They have lost their life savings. To make the problem worse, the bankruptcies of corporate giants have weakened investor morale terribly. Some people have completely sworn off stock investments entirely.
Can you blame them? What must people do to get their confidence back?
The timing of your question makes the answer a more difficult one. The investment markets have risen substantially over the last few months. These gains were not limited to just stocks. They also consisted of bonds (both high quality and junk bonds), energy, utilities and precious metals. Hence, the importance of your question might be masked with the current investment euphoria of the typical investor. Nevertheless, the question is an important one and I hope to answer it in the following paragraphs.
First let me clarify that if a typical investor lost their life savings in this bear market, it was not solely because of fraud, trust or corporate bankruptcies. Typically, the cause would have been investment mismanagement, either by themselves or by their investment professional. Of course if the investor worked for a WorldCom, Enron, Lucent or the likes the reasons above may or may not have applied.
Prior to the crash of the NASDAQ, we were living in an era of corporate greed and governance without an emphasis on fiduciary responsibility. Well-known companies had been accused and have subsequently admitted to corporate fraud. A few of those names are Enron, Lucent, Waste Management, Sunbeam, Tyco, WorldCom, Global Crossing, Health South and Cendant. It is of our opinion that this list will grow as investors, analysts and Corporate Governance Groups gather more information. This corporate greed and lack of fiduciary responsibility most certainly should open up any investors eyes and give the investor the opportunity to exercise the power of doubt in their endeavors of investing.
For all of time, humans have been plagued with deceit and lack of fiduciary responsibility of a few. Governments and agencies attempt to place safeguards to minimize the occurrences of these disgusting events, but inevitably the curse of fraud and deceit exists. The U.S. financial system is based on trust of the system. I think it is important for all of us to recognize that inherent trust, but at the same time never fail to exercise the power of doubt and professional skepticism.
I have discussed the power of doubt with a friend of mine on several occasions (he actually introduced me to an essay on the concept.) He gave me an essay several years ago and the key takeaway for me was the phrase, “Doubt is Central to Understanding.” The power of doubt is so crucial. Doubt is a difficult concept for the typical person to embrace and explore.
Once again, investors must recognize all of the above when making investment decisions. The question mentioned that people have sworn off stock investments entirely. I do not believe we have yet witnessed that occurrence. The concept of swearing off a type of investment is called “capitulation”. It so happens that recent investor sentiment surveys are showing that investors are as bullish now with investing as they have been for many years. The American Association of Individual Investors recently showed a 62.8 % bullish sentiment in its survey dated May 29, 2003.
We all recognize that no matter who is to blame, many portfolios lost a great deal of value (as I mentioned in last months article, our managed portfolios have generally made money during the NASDAQ crash.) We understand that investors’ morale is low and that there has been a loss of faith in the “system.”
“ What must people do to get their confidence back?” People need to have an inherent trust in fellow man and the system, yet not have a blind faith in that trust. Investors need to re-educate themselves and try to align themselves with people who can help them interpret the financial system; it’s risks, rewards and various possibilities. People need to make sure they stay diversified and balanced. People need to apply logic to their investments. They need to realize that an investment is nurtured over time. Investors need to ask questions. If an investor doesn’t trust something, they need to exercise prudence and doubt to see if they can either prove their lack of trust or to conquer the fear of mistrust.
I am fortunate that I have the training to analyze financial matters and the ability to exercise doubt. I understand that the financial system has its weaknesses. There are things that I am concerned with in the financial system, yet I have an inherent belief that the financial system will survive. I believe that the current financial distresses that exist in our financial system will become the seed of a better system in the future. Some of the current distresses I am concerned with are the use of derivatives by our financial institutions, the global economy and how that will affect the high standard of living for the typical American, the outsourcing of manufacturing and services to foreign countries, the use of debt by the typical American, the reliance by the government and Corporate America on the consumer to keep spending at its recent pace, and the blind belief by typical Americans that Real Estate will always increase in value, no matter what the current price is.
Crisis occurs in life. Very often, crisis is the seed of opportunity.
Please feel free to contact us for a free portfolio review. My name is Ronald R. Redfield. Our company’s name is Redfield, Blonsky & Co. Please look at our website at http://rbcpa.com, which has wealth of accounting, finance and investment information, etc. Our phone number is 908-276-7226. If you would like to be placed on our email list, please send us an email with your address to be added.