Some things we learned in 2008:
- You really can't trust analysts and other so-called "experts." Most are just playing the Wall Street game in which the goal is to pull as much money into the system as possible. These experts are actually just market cheerleaders who all benefit from "assets under management" in some capacity.
- For individual investors, 2008 represented a change in strategy from Buy-and-Hold, to Buy-and-Hope, to Buy-and Hold Your Nose, to What the heck happened to my money?
- When true market panic hits, there are no safe havens for your money. Commodities provided insulation for quite awhile, but when there is a global recession, energy prices, agriculture prices, and basic materials all experience demand destruction. Cash became risky as well as we saw negative yields on treasuries, bank failures, and a weakened dollar. Gold experienced swings with global currencies weakening against the dollar and investors speculating. US multinational corporations, which did wonderful in 2007, finally weakened as the global economy slowed, the weak dollar stopped contributing to earnings, and credit was much harder to come by.
- Companies we thought we conservative by nature fell into the same trap of chasing extra earnings by taking on excessive debt and risk. You can look back at every market crash and subsequent economic decline, and they are all manifested by the same factors: Excessive debt, increased risk, too much speculation, and people engaging in business outside their circle of competence (for example, mortgage-backed securities, CDO's etc).
- You cannot create prosperity through false growth. Inflating assets above their true value only creates bubbles and the increased wealth doesn't last. Few people end up profiting in the end, and many people lose.
- Although bailouts help to calm panic, they rarely work, as they typically condone the risky behavior that got the company in that position to begin with. It will be almost impossible to track where the money truly is going, and its doubtful we'll get it back. Its impossible to decide who deserves a bailout, and who does not. Once you allow politicians to start spending additional taxpayer dollars, they won't stop. We'll see a lot more taxpayer dollars going out to who knows where in 2009. We should not reward backward-thinking management that cannot adapt to the changing global economy.
- Its very difficult to invest when the rules are constantly changing. To paraphrase Mark from Fund my Mutual Fund, investing in the current environment is like playing football with the goal posts constantly moving. This has become a traders market, as things change by the hour.
- The world is much more inter-connected then we thought it was. European and Asian markets have been impacted just like the U.S. has, and there was no dislocation from what was thought to be a "US problem."
Looking ahead to 2009, there are a ton of question marks, and few certainties. Here's a few things I see happening in our world in 2009:
- The economy is in for a rough year. If 2008 was the year that the financial industry took a major hit, 2009 will be the year the economy gets hit. We're going to see a lot more unemployment, and this won't be able to help other areas of the economy such as housing, retail and credit. In order for people to pay off debt and start buying things again, they need steady income because we're not a nation of savers.
- Luxury goods will continue to be swapped for generic-type names. Just as late 2008 was good for Wal-Mart and McDonalds, 2009 will see that trend continue. People are going to stop paying twice as much for a Mac than a PC. Discount retailers will continue to see increased business, and specialty retailers who are more expensive will continue to lose sales. Not out of choice, but necessity.
- Obama's economic stimulus plan will help cushion the blow in employment and GDP will come out better than it would have. But its not necessarily real growth. The stock market will rally a few times, especially in infrastrucutre stocks, as more details are reveled about where the money is being spent.
- We'll continue our push to alternative fuels, but it will be dampered by the lack of capital and lower energy prices. Money is needed to fund research and building of these projects, and although it will continue, it will be slowed. Lower energy prices also replace the extra incentive to switch sooner. Speculation will still be engaged among solar, wind, and other various stocks, but volatility will remain. Stock declines will be good opportunities to pick at small positions if you're so inclined.
- The stock market will rally at various times throughout 2009 when there is a lack of news, or during the economic stimulus period, but nothing sustained. I think we'll retest our market lows, and at some point take another move down. This will be impacted by how bad unemployment gets and if more industries and local governments need taxpayer assistance. I believe we're going to see consumers strapped, and local governments running out of money. These types of event are what will shock the market in 2009 as opposed to 2008 when it was investment banks. At this time, I see no compelling reason to buy stocks other than fairly attractive valutions. Until we get a better picture of earnings, and how emerging markets will perform, its difficult to buy with much conviction. I do think Chinese stocks (as well as a few other emerging countries) will be worth buying again, but they may not recover for awhile. Obviously US blue chips will be good buys, but there isn't a huge hurry to get in as I think we'll see cheaper prices. Focus on companies with little to no debt, and companies that don't rely on debt to finance operations, or to make profits. The fundamentals of most financial companies have become impaired, and it will impact earnings for awhile.
- It will be a tough year for the economy and many people, but the U.S. will pull through. For the most part, we have a nation of optimists with a strong resolve and work ethic. It may take some time, but it will get better, I'm fully confident in that. The U.S. will play a different role in the world during the next couple of years and beyond, but thats not necessarily a bad thing.
I hope you all have a wonderful holiday season, and a healthy and prosperous 2009!