how to make millions, now

I know that things look bad now. I grimace every time I peek at the market.  I work in the financial services industry, and trust me, it’s bad.  Real bad.  I know that we still have room to fall.

Yet I have the same conversation with my co-workers over and over again. One of two things will happen here.  One possibility is that we will enter a massive and unprecendented period of stagnation, and those of us relying on the market for our retirements will be in dire straits.  The other possibility is that this market downturn, like 1987, like 1999-2000, like 2002, is temporary.

So imagine if the bad scenario occurs. Investments in the market plunge, the dollar is replaced by the amero (google it), and revolution occurs.  In the good scenario, however, we emerge in a few years from the current mess with a weakened but still whole system, and the market resumes a slow climb.  In the bad scenario, we are on the ropes, not just as an economic superpower but as a country.  In the good scenario, we still have a few rough years ahead but we’ll manage to pull ourselves (and the rest of the world) out of the abyss.

I prefer to assume the good scenario’s going to happen, at least from an investment point of view. If the bad scenario’s coming, then all of my savings are more or less worthless, anyway.  If the good scenario is true, then money put in the market now will buy securities at a discount. Fortunes are out there to be made.

I like to look out the window once in a while and remember that people are still eating at McDonald’s; people are still buying food at the supermarket and socks at the department stores. The media would like to confuse all of us and convince us that a market downturn is an economic downturn – and while the two are closely related, they aren’t the same thing.  People who are ready to take on risk now are going to profit from the fear and panic selling of uninformed people now.   Make sure you’re positioned to profit and not part of the panic.  And look on the bright side – if I’m wrong, we’re all going down anyway.  That’s a plus, isn’t it?  Isn’t it?

7 mistakes not to make in a crisis

Watching the market these days you can be forgiven for a case of the heebie-jeebies. I’ve got them.  You have two choices in dealing with downturns like this:  either assume it’s the end of the world and time to start buying canned beets and bullets, or accept the conventional wisdom that this is a downturn like every other downturn in economic history.  If you believe that, you believe that things are going to turn around eventually, be it six months or six years.

Great Depression
photo credit: Koshyk (traveling)

Here are 7 mistakes I’m not going to make in this crisis:

  1. Listening to pundits. I was watching a series of comments by guys working at firms that have a hand in this crisis – brokers, bankers, candlestick makers.  Remember this:  brokers win if you buy OR if you sell.  They don’t care if you gain or lose, just that you move your positions a lot.  Don’t be fooled by guys telling you it’s time to get out – they get the same commissions when you sell that they do when you buy.
  2. Stopping 401(k) contributions or withdrawing from retirement accounts. That money’s set aside, tax advantaged, and already “in there.”  I’m not a financial adviser, but I’ll tell you this – I’ve upped my 401(k) contribution rate.  That is the easiest method of averaging out purchase price on funds that I know of (other than Sharebuilder).  I’m going to keep putting money in my 401(k)’s S&P 500 index fund.  Why not?  Tax free investments in a cheap fund?  Sign me up.
  3. Doubling down on my job. You may think now is the time to concentrate on your job and cling to it like grim death.  Wrong.  Now is the time to network, expand your skills and polish your resume.  Now is the time when you have to be prepared – more than ever – to make a move to a new job or even a new career.  I’ll give you an example – I’ve been attending seminars on emerging accounting issues to increase my consulting “cred,” and at the same time I’ve been looking into the requirements for a complete career change.  I’m also making sure that I keep up my contacts, even as 50% of them are laid off.
  4. Neglecting my health. Market goes up, being healthy pays off.  Market goes down, being healthy pays off.  I’ve been neglecting my health recently.  My weight is up, fitness is down and my eating habits are terrible.  I’ve started focusing on eating raw foods during the day at work, I’ve walked to work (involuntarily, due to car troubles, but I actually like it) and I’ve realized that I ought to take advantage of health insurance while I have it.  Your health is an asset, just like an IRA or a house:  protect it.
  5. Taking on excessive risk OR being overly conservative. If you think now is the time that you can throw money in penny stocks and become the Buffet of Pennies – OR if you think it’s time to stuff euros in a sock in your closet – pull yourself together.  As I said above, if you think this is the final economic crisis in the US – the beginning of the Road Warrior years – yank everything out.  If you think you’re a lucky, lucky investor, plow your money into speculative junk equity.  If you’re STILL convinced that the broader market will recover someday, do this:  stick to the investment plan you had a month ago!
  6. Giving up on positive thinking. If you are like me, you are getting killed by negativity these days.   I work in the New York financial services sector as a consultant.  “I told you this was going to happen” is not something people want to hear from their governance consultants these days.  Me, I’m absorbing the hateful defeatist feelings at my client, one of the poster children of Bailout America – but I’m fighting it, at least for the last two days.
  7. Assuming my opinion doesn’t matter. Again and again you’re going to hear from the presidential candidates what they will do and what they will fix.  Let me tell you a secret that no presidential candidate wants you to realize:  they can’t START anything without Congress.  And a second dirty secret is this:  your Congressman/woman is assuming you will vote for them once they are incumbent.  But you know what?  Your opinion matters.  I started writing letters.  I’m going to get angry and get active.  Your opinion matters just as much as Hank Paulson’s or Barney Frank’s.  They are citizens, with one vote, just like you.

Mistakes? I’m sure I’ll make plenty.  But I am trying my best in this crisis to realize that the biggest mistake I can make is changing my core beliefs in how to behave, how to invest and how to live.  If more of us take charge of what we can control, we’ll be able to devote more of our attention to controlling our economy.

why the bailout won’t work

A truly disturbing video:

And if you had any doubts about who was going to handle your $700 billion – the new “Office of Financial Stability” – Secretary Paulson has tapped a Goldman alum to dole out your tax dollars.  I’m sure everyone finds that as reassuring as I do.

ostrichism

Ostriches don’t actually stick their heads in the sand, despite what Bugs Bunny cartoons and op-ed cartoons might tell you:

When lying down and hiding from predators, the birds lay their head and neck flat on the ground, making them appear as a mound of earth from a distance. This even works for the males, as they hold their wings and tail low so that the heat haze of the hot, dry air that often occurs in their habitat aids in making them appear as a nondescript dark lump.  (link)

I will still use that as a metaphor for financial behavior, though – it’s just too useful to discard. I know that I’ve been guilty of ostrichism recently.  Although I’ve paid a lot of attention to what’s going on in the markets, I’ve also engaged in a certain amount of avoidance.  I haven’t started insisting that we turn off all the light and huddle in one room, or save aluminum foil, or hoard food scraps.  I assume that this is a glitch and at most we might be inconvenienced by the downturn in our stock portfolios.

Lost in Thought?
photo credit: jimbowen0306

To become a successful investor in the broad-average sense of the word (an index fund investor who doesn’t try to out-Buffet Buffet), you need to be able to put your head in the sand from time to time. You need to shut out the screaming and self-flagellating TV personalities and realize this:  a stock market correction is a stock market correction.  People are still going to their jobs:  assembling cars, processing invoices, filing claims and flipping burgers.  Very little of that has changed.  If you want to pretend that stock market fluctuations are affecting the ability of the nation to get up, go to work and grab a coffee along the way you can go ahead and think that way, but the reality is that life goes on. Stick your head in the sand.  If you were happy with what you were doing in terms of investing and saving, stick to it.

have MBAs been devalued by the crisis?

Graduation Cake GuyWhen I went to graduate school, an MBA was still an achievement – it almost guaranteed getting the job you wanted and conferred an impressive status (at least in the business world) on anyone who held one. Consequently, the popularity of the MBA grew and grew over the last couple of decades.  In today’s corporate world – at least in New York – you can’t throw a pencil in a conference room without hitting an MBA.

I found myself wondering yesterday whether the current crisis has devalued the MBA. President Bush is the first president with an MBA.  No doubt many of the men (and don’t doubt for a minute that the overwhelming majority were men) who crafted the clever securities now causing so much commotion were MBAs, as well.

So will the nation see a drop in business school applicants, both from disgust with the horrible way in which these executives have handled the crisis (and before that, their companies) and due to fear of a vastly shrunken market?  I think we will see that. I think this crisis will make a lot of young people wonder if Wall Street is such a great place to work.  I think more college graduates will pause before assuming that they want to incur more debt just to get a degree to work in an industry in massive flux.

Only time will tell, of course… but I think an MBA today won’t be worth as much as it was even a year ago.

photo credit: CarbonNYC

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