It Isn't Working the Way It Was Designed

Roger Schlesinger
|
Posted: Oct 20, 2008 5:40 PM
It Isn't Working the Way It Was Designed

The stock market isn't even recognizable, let alone similar, to the way it was designed. The idea of buying stocks, classically, was to get a dividend that would give you a return on your money. "Growth stocks" were more expensive, higher price/earnings ratio, because they would most likely yield a higher dividend in the years to come. Dividends were what companies strive for to keep their investors happy. I dare say that the younger generations couldn't tell what a dividend is, where it comes from and why it is important. People buy stocks to get price appreciation and investors buy stocks to get capital gains through price appreciation. That sums up the first 10 reasons to buy stocks. Bonds were debt instruments issued by companies usually to expand their infrastructure or purchase capital equipment. The government got into the bond game to finance the ever-expanding ideas of the leaders of our country: good or bad ideas. The interest provided a yield to the bond holders. Because interest is now a market of its own, many buy bonds for capital gains. If you can buy a bond (includes bills and notes which are also debt instruments) under the face value, especially those offered by the government, then your return is enhanced when the bond is repaid. This works especially well on the two year treasury note when interest rates are higher than the note rate.

Why are people surprised that others invest in houses? Yes, houses were designed to be a place "to hang your hat" and while an investment is going on it is used that way, for the most part. That doesn't stop it from being an investment. Today with the “drop off a cliff" scenario (a stock market term used for real estate) of the stock market they are advertising it as a better time to buy than ever before. Guess what? This holds for real estate as well. The only difference is real estate has a built in price escalator that the stock market probably can't match. Prices of raw materials keep rising, land, especially desirable land, is in short supply with nothing on the horizon, new energy laws are adding to the cost and government is always figuring out ways to increase the fees. When building of homes begins again in earnest, probably six months to a year away, in the better areas you will either see prices the same and house sizes 1/2 to 3/4 of what they were or 25% to 50% higher prices on the same size home. If you think they won't sell to us they will sell to foreigners who have a huge price advantage based on the currency of their country.

People always tell me that they will never go back into the stock market. That they will rent only from now on and when I remind them about what they said a few years back while they are telling me of their additions to their stock portfolio while we are having dinner in their new house they can't remember making those statements. The time to buy an investment is when everyone wants out; the time to sell is obviously when everyone wants in. Easy? Not a chance. It is just about as easy as taking the most insipid medicine you can think of on an empty stomach. Will you like it? No. Will it get you well? Most likely. Why can't people think that way? I believe it is because most people need validation of their actions by others to feel secure and nobody is going to validate a contrarian approach to investment. Or at least very few people. Bernard Baruch, an adviser to many presidents, once said "the only people who buy at the bottom and sell at the top are fools and liars". Why? Because you don't know where the bottom or top is until it has turned and gone the other way.

Today everyone has been hurt to some degree with the stock markets steep decline and the real estate devaluation to various degrees in most areas throughout our country. You can either develop a dialog that allows everyone you meet to know how much you have been hurt financially or you can take the same energy and develop a plan that could speed your comeback. You need to concentrate on the positive and you may be able to make this crisis a catalyst for financial gain. Here are some simple ideas that might make a major difference in your financial life:

1. Create value in your current house through sweat equity. Start looking at ways to improve your home that you can do yourself: landscaping, converting storage space to usable living space, modernize your bathroom fixtures, change your flooring, etc.

2. If you don't own a house and currently rent start looking at lease options as a way to get into a house at today's low prices.

3. Study the stock market and see if you can find good companies that have been knocked down to a price that hasn't been seen in decades. If it is a vibrant company it most likely will recover over time and you will enjoy the financial benefits of the recovery.

4. Talk with small business owners that you know and admire and see whether you could possibly become part of their business. You might be surprised at who might be looking for a partner to help keep them afloat.

5. Act on one of your ideas and create a business "that's time has come". If your idea can work in this business climate can you imagine how good how good it can be when the economy recovers? Start small if you have to, but start going now!

Any positive steps you can take now could reap enormous rewards in the future. People who act when others are paralyzed turn out to be the success stories we read about. Since I started writing this column I have come up with an idea that has been lodged in my mind for a long time that might just be a help to society and a financial boon for me. Action will create a different state of mind. Movement will help you begin to feel better about the situation and help you concentrate on the positive, not the negative. In no time this financial downturn can become the bedrock of your new financial being. It is up to you!