Crisis Investing: Considering 9/11
Last Updated (Tuesday, 30 September 2008)
Written by Hank Brock, CPA, MBA, CLU, ChFC
In our last post, we mentioned we would try and post a piece that was prepared for our clients on September 11, 2001. It is entitled "Crisis Investing." We hope that you will find this reposting both of interest, and reassuring.
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September 11, 2001
Dear Client:
Like you, we here at Five Star are saddened by the loss of countless lives at the hands of the terrorists in the attacks that occurred today. I am sure that all Americans, and all decent people throughout the world, will sympathize, condemn, and take the needed steps to lessen the likelihood of a repeat occurrence.
I am sure you are wondering what the impact of today’s terrorist attack on the World Trade Center might have on the stock market in the upcoming days. Of course, neither the stock market itself nor any money manager can prepare itself for such an event any more than the general public or the most sophisticated security systems employed by our national security agencies can prepare for such an event.
But, it does help in times like these to step back and take perspective. I was just reminded about a conversation I had just three days ago (Friday), when I spent three hours visiting with one of the most highly regarded persons in the financial services industry and in Utah. Over age 70, he observed, "too many people do not think things through adequately. Think things through. And don’t over-react to events."
To this end, I have prepared a sheet titled "Appreciating Crisis Investing." Note that the average return during the year following a "bear" market is 32%, and the average return following a crisis that caused the market to plummet was 21%.
It is likely that those few who panic will drive the Dow Jones Average down 500-1,000 points (or more) tomorrow. (At this writing, I have unconfirmed reports that the stock exchange might be closed as long as until next Monday, September 24th. That would be wise.) Regardless of a few who typically panic, the vast majority will keep their heads about them and ride this through – sometimes that’s all we can do. Then, there will be a few who will rightfully see this as a further "buying opportunity," given that the market is already selling at what we believe to be a 40% discount.
That great American financier, J.P. Morgan was once asked how he accumulated all his wealth. His response? "I buy my straw hats in the wintertime." I can picture him in his Pullman Train Car heading from New York to West Palm Beach. We all know people who do their Christmas shopping the week after Christmas, buy their snow-blowers in the
Spring and their lawn-mowers in the Fall. Why do we understand "Contrarianism" in the consumer realm, but don’t recognize it in the investment realm? The laws of supply and demand remain the same, and make this a great buying opportunity, perhaps the best I’ve seen since Jimmy Carter was President some 20 years ago when the Dow was at 750 (now its around 10,000). If you have money invested for the long-term that are in money market funds or CDs right now, it is probable that by the time you get back into the market, you will have missed 20-40% on the upside. Now is the time to invest.
What if the terrorist had instead plowed the plane into the building of the New York Stock Exchange? Or the Prudential Tower in Newark, NJ? Or the John Hancock Tower in Boston? Did you know that every day each of those organizations and virtually every other major company in America downloads all their data to a remote record-keeping site hundreds or thousands of miles away? (I know that in Hancock’s case, it is in New Mexico.) Most of the investing public is not aware of this.
In summary, there might be some stormy days ahead, but in time, the ship will right itself and all will be well. The Number One Rule of the Successful Investor: Patience. There has been turbulence before, and there will be turbulence again, and those that keep their heads about them will do fine. Keeping perspective breeds patience. Study the attached sheet, and keep perspective.
Sincerely,
Hank Brock, CPA, MBA, ChFC
President
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