Resist the urge to sell!

lucyb —  October 17, 2008

Given the unprecedented financial crisis of the last several weeks and the intense daily swings in the market, we wanted to reach out to you directly to discuss what has happened. First, we have spoken to many of you over the past few weeks. We know it is very painful to live through major market declines. It is painful for us as well, as we are invested in the same portfolios as you are.

After Thursday’s trading the S&P was down about 35% for the year and about 40% from its all-time high. The last few weeks have treated us to numerous roller coaster rides featuring daily market swings of 5-10% from the daily low to the high! All this is out of our control.

 

We don’t know exactly when this bear market will end. However, we do know that bear markets come to an end and that this one will, as well. Wild market swings, panic selling and investors eager to disinvest at market lows are all things that happen near market bottoms and they are happening now. The stock market has declined sharply with every bit of news the last few weeks. Many investors have given up hope. When there are no more sellers, stocks stop declining and begin the process of coming back. Meanwhile, shares have changed hands from the impatient and frightened to those more patient and less fearful (I say less fearful as recent events have left even seasoned investors shaken).

Perhaps the market is already stabilizing. Monday’s huge gain was followed by two days of give back as the market went back down. Weak economic data (retail sales) caused Wednesday’s sell-off. Then, Thursday the Dow traded down as many as 400 points before finishing 400 points higher. The large daily gains that follow the large daily losses interrupt the downtrend and lend hope that the recent declines may have run their course.

There are some reasons for hope other than simply saying the market went up Thursday. It went up for a reason — a few reasons, really. First, a slowing economy showed up in the form of benign inflation data. The CPI for September was unchanged from the prior month. That will make it easier for the Federal Reserve to either keep interest rates where they are or to boost the economy by cutting rates even more.

Secondly, crude oil prices dropped to under $70 a barrel today, off 50% from recent highs. You may recall that high gas prices were partially to blame for the current slowdown in consumer spending. We may soon see the inverse of that phenomenon as prices at the pump drop.

There has also been some good news this past week in the credit markets. Bloomberg News reported Thursday that California increased the amount of bonds/short-term notes the state had planned to sell to avoid a cash shortage, after bond demand proved to be solid. California State Treasurer Bill Lockyer said he’s increasing the note sale by $500 million to $4.5 billion while also lowering the yield range, or interest rate, to a maximum of 4.25%. California is the largest borrower in the municipal bond market and potentially a barometer of the ability to lend. Last week IBM successfully sold $4 billion in bonds. Taken together, these transactions may be evidence of a thaw in the frozen credit markets. More importantly it may be the first evidence that the Fed actions are beginning to gain some traction.

Finally, Warren Buffet has weighed in with an Op-Ed piece in the New York Times saying that he is buying U.S. stocks now!

The federal government is responding well, though perhaps late by some measures, to the crisis. The coordination with central bankers around the globe helps give us confidence. Additionally, political leaders and central bankers around the world are clearly committed to continuing to take appropriate actions designed to help the credit crises resolve.

Rather than pontificating on what went wrong, we believe our best contribution is in discussing what to do now. So what do we take away from this week’s market in general? The answer is hope that the market is beginning to stabilize. It is premature to assume that Thursday’s 400+ point move higher means the worst is over and a recovery has begun. We expect extreme volatility to persist. That said, this week was encouraging because the market responded positively to good news, and that is encouraging.

So what do we as investment managers and investors? First, you need to know that your investments with Fried Asset Management are held at a very solid company, Charles Schwab. Schwab has had no write-downs from exposure to sub-prime mortgages or any of the other toxic debt that has plagued many of its peers.

Secondly, we stick to our investment discipline. The ability of any investment manager to perform over time depends on his continuing to follow the investing discipline that has produced results for him over time. Our Buyback Strategy® has proven itself for more than a decade. We continue to have the courage to stick with our strategy. While we are in the midst of a month that, if it ended today, would be worse that any year we have ever had, we know that one month does not make – or unmake! — a strategy. We know that the stocks we have invested in are sound and that we will be well positioned for future gains. We have suffered through one of the worst bear markets in decades. However, the laws of economics have not been repealed, so it would be foolhardy to abandon our strategy at this point.

lucyb

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