STI - What happen to you?

STI is becoming like London Bridge. London bridge is falling down, London bridge is falling down.

Why? Worry selling? Similar to people rushing to AIA office to quickly terminate their policies so they can sleep at night without further nightmare.


Summoning the Courage to Continue Investing
by James B. Stewart
Wednesday, September 24, 2008

As president, Franklin Roosevelt confronted far more dire circumstances than anything we've experienced in my lifetime, let alone last week, and yet he never succumbed to panic, desperation, greed or, most famously, fear.

In 1932, in the depths of the Depression, Roosevelt gave the commencement address at Oglethorpe University in Atlanta: "The country demands bold, persistent experimentation. It is common sense to take a method and try it. If it fails, admit it frankly and try another. But above all, try something."

The proximate cause of last week's crisis in the financial markets, which evidently brought us to the brink of economic catastrophe, was paralysis: the refusal of banks to lend virtually anything, even overnight loans to their fellow bankers; the immediate demands for repayment of collateral and the refusal of investors to trust counterparties; the aversion to all forms of risk, real or perceived.


As paralysis seemed to grip our major financial institutions, I felt some of this myself. One day last week I returned to my desk to find Morgan Stanley (MS) trading at $18 as rumors swirled that it would be forced into a merger by week's end. Goldman Sachs (GS) (whose shares I own) had plunged to $100 as speculation mounted that it, too, couldn't survive as an independent institution. Had anyone told me even a week ago that two of the most venerable and respected names not just on Wall Street but throughout the world stood on the brink of extinction I would have said he or she was delusional.

I told a colleague that this was irrational; Goldman had just reported healthy earnings even under dire circumstances and was worth far more than $100 a share. At the same time, I said I couldn't bring myself to buy. "Who am I, one small investor, to stand before this tsunami?" I felt helpless in the face of forces far greater than myself.

Details of the Bush administration’s bold and costly plan to break this market psychology by providing up to $700 billion to buy the mountains of mortgage-backed debt and other toxic securities which are crushing the balance sheets of financial institutions remain unclear, perhaps by design. Congress can and should debate issues like excessive executive compensation and foreclosure relief, but these are not the issues that have caused today’s crisis. The government needs a bold, simple plan that offers maximum flexibility and jolts the financial heart into beating again.

So I am not going to dwell on the uncertainties and details, important though they are. There have been times in history when we as individuals have been summoned to a higher purpose than partisan ideology or what may seem to be our immediate self interest. This is one of those times.

In times of financial crisis, collective action can achieve what would be unacceptably hazardous for any one individual, J.P. Morgan's 1907 summoning of the country's major bankers to share information on the ongoing financial crisis being one famous example. Deploying principles of Keynesian economics for the first time, Roosevelt borrowed against the future productivity (and tax payments) of American workers to intervene massively in markets and the economy. This past week, we, as taxpayers, have again been asked to stand together in the face of crisis, to the tune of $2,000 for every man, woman and child in the country, the New York Times reported.

Put that way, $700 billion strikes me as a not unreasonable price to pay for the stability of the financial system on which our entire economy and collective well-being rest. I happened to speak late last week with high-ranking executives from three major industrial companies, Eli Lilly (LLY), Cummins (CMI), and General Mills (GIS). All said that thus far, the turmoil on Wall Street has not impaired their ability to finance their operations. At the same time they left little doubt that left unchecked, the contagion could have dire consequences for the broad economy, as opposed to the financial sector where thus far it has been contained.

The administration's proposal has not been accompanied by much high-minded rhetoric aimed at the American people. That is unfortunate. The plan, no matter how expensive or sweeping, will fail if all of us continue to be gripped by fear and risk aversion. Even if you managed to shift all your assets into gold and short-term Treasurys, it would surely be small consolation if nearly everyone else lost their life savings in collapsed money-market funds and bank failures and we faced another depression. It is time for all of us to summon the courage to invest calmly and rationally and in doing so demonstrate our confidence in the potential of the global economy and in our fellow man.

What, in practice, does this mean?

It means continuing to accept and even embrace a prudent degree of risk. No investment is entirely risk-free and the mindless quest for safety is damaging not only to your likely returns but the system as a whole.

It means to continue following a disciplined approach to asset allocation and investments such as the one I have long advocated in this column. Despite last week's wild swings, the market did not reach one of my buying thresholds, which is to buy on 10% dips. Had it done so, (2025 on the Nasdaq) I can assure you I would be buying.

It means to continue rebalancing your portfolio, taking profits when positions become overweighted, and adding to those that have fallen below your targets. I expect to continue my gradual additions of financial stocks in the belief that we will weather this crisis.

It means considering investment alternatives. I found myself this weekend looking at real estate listings. During the real estate crisis of the eary 1990s, I bought a Manhattan apartment which I rented to a sushi chef from Japan. People thought I was crazy. Not only did I eventually sell it at a handsome profit, but I received a Christmas card every year thanking me for the privilege of being my tenant. Based on my perusal this weekend, in some parts of the country we have reached the kind of opportunity to buy real estate that only comes along once a decade, if then.

I wish I had bought Goldman Sachs at $100 a share, not because with benefit of hindsight I know it is trading higher, but because my small action, magnified many times by countless other investors willing to act with the courage of their convictions, will withstand the force of a tsunami.