Gerald Loeb wrote The Battle for Investment Survival in 1935 in response to the great stock market sell-off of 1929 that spawned 10 years of economic turmoil. In it he cautioned that “it’s a great mistake to think that what goes down must come back up.” Looking at a Dow Jones Industrial Average trading 50% below year ago levels, it’s clear that this bear market is firmly entrenched. What’s not clear is when it will end.
The 10% Rule
Investors, reeling from losses in nearly every sector, are searching for protection. For some it may be too late, but for others, there is the 10 percent rule. Simply stated, Loeb suggested that a drop of 10% or more in a new investment requires a new reality and the old buy-and-hold theory should be shelved in favor of disaster insurance. The 10 percent rule offers an exit strategy while leaving funds for future investments in a more favorable environment.
Capitulation
The orderly sell-off in U.S. equities suggests further losses. Many may have been hoping for capitulation, panic selling on high volume with dramatic price declines. Capitulation can be triggered by some shock to the economic system and, for some, is a signal of a bottom in prices.
Bailout or Bust
But the talk of an insolvent U.S. financial system and daily bailouts of major money center banks and institutions deemed too big too fail hasn’t produced panic selling. Instead a daily erosion in confidence, trust and prices has occurred. Feeble rallies are met with selling pressure. Dividends are slashed, but management remains in place.
Nationalization?
Tough love may be the only answer. That’s the prescription the U.S would give to other countries suffering financial fractures. Instead of the piecemeal rescue of a billion dollars here and a billion there and rewarding bad behavior, nationalize the banking system and close down the losers. Restructure the winners and, in time, sell those banks to the private sector. It worked in the 1980s and the Savings and Loan crisis, why not now?
Bring regulation into the 21st century, taking into account the global nature of the economy and the interconnectedness of all global financial entities. Admit that free-market capitalism needs some regulation to weed out greed and bad management. Only then will trust be restored and confidence return to investing. Until then, look for prices to continue their descent into irrelevancy and get out when another 10 percent loss is registered.
 |
 |
 |
