The Bull Inside the Bear - Is You!
If you’re looking for a candid explanation of the financial crisis and what you can do about it, you couldn’t go wrong with investment manager and former Federal Reserve economist Robert Stein’s new book, The Bull Inside the Bear
. He puts a perspective on recent events that paves the way for rational thinking
. I found his review of the fundamentals of economics in the context of the financial crisis to be most helpful. Here are several excerpts:
The subtitle, Finding New Investment Opportunities in Today’s Fast-Changing Financial Markets, is well met
- We must look at the present in the context of the past. This helps to keep things in perspective that the sky really isn’t falling and financial Armageddon isn’t upon us.
- The events of 2008 stemmed from a breakdown in the financial system, not the economy. The economy was already weak and this was a hit where it really hurt. But the economy was still standing…. Our economy survives recessions and can combat inflation, but a meltdown of the system that supports the economy is a different story. Inflation is not the front page story, although it will be in the future. First we have to survive the credit crisis, and then we must prepare for a change in long-term economic fundamentals like inflation.
- The remedy for a problem in one sector becomes the tonic to boost activity and opportunity in another. The key is to look for the remedy and follow it where it flows. And that, in a nutshell, is the bull inside the bear. (Now the next bubble is the last leg of trade positions in Treasuries: Bonds.)
- The recurring cycles of expansion, peak, contraction, and trough, have not changed—thankfully. We need all four for a healthy economy, the contraction just as much as the expansion, even though most people think of contraction as “negative” or “bad for the economy.”
- I would advocate changes in mark-to-market accounting to avoid massive writedowns of depreciating assets.
- Contraction of the credit market has led to classic deleveraging…. The problem is one of delveraging of assets and the lack of liquidity. Deleveraging is just a fancy way of saying that a particular asset—a house, for example—can only be valued based on factors such as the location, size, type of property, and so forth. If this sounds like a return to the good ol’ days when a perspective buyer with a down payment in cash met with the local banker to discuss a mortgage, it is.
- As for your own home sweet home, appreciate it as a place to live, whether it’s a lot in the city or a house in the distant ex-burbs. This is your home, your castle—not your ATM machine.
- I can’t see the necessity of making more than a few changes in your portfolio each quarter or actually each year. Try to wait for at least two data points before jumping in. (He shows you where to get those data points and how to analyze them.)
and should be reviewed by anyone considering where to go next. I’ll leave you with two more thoughts:
"Having a long term view and the discipline to stay the course is commendable. However, a multiyear time horizon for your investment portfolio doesn’t mean buy, hold, and forget about it. You need to be actively engaged as an investor. That means staying nimble and alert, with an eye on the big picture." (Key: Utilize ETFs
(Exchange-Traded Funds) to diversify your portfolio.)
"The more educated and empowered you are, the better decisions you will make—not by listening to the talking heads on television or reading the latest bog posting. You will do your own homework and your own research, paying attention to the economic indicators that tell you what’s happening. This is not difficult, and it will put you in the driver’s eat as you make investment decisions based on better rationale than buy-hold-and-forget it or panicking and following the crowd."