Saturday, May 22, 2010

"Dr. Doom" says....well, read the article

I have done, well, not too badly over past years in dealing with the stock market.

In the 90s, I did quite well. It helped me into my next house. Then I got out of it for a while and just before the dotcom bubble burst sadly, I got back into it. Up to that time, I was always able to say that I had never lost money on horse races or the stock market, I only made money.

Then, during the dotcom bubble burster, I lost for the first time. But only about $7,000 overall and well, I wasn't the only, nor the worst stung by that one. So I panned that and got into paying more attention to my 401k, and only that. Paying special attention about how to be careful, yet I tried to be as aggressive as reasonable. I ended up doing very well. But that time, I didn't have a chance to tell anyone, and no one else benefited.

Now, I can change that situation. And so, here is that story.


Before 2000, I did quite well in day trading stocks and with my 401k. The trouble there was, I took an entire year to learn day trading. Unbeknownst to me at the time, it was one of the last two great Bull markets back then. So that next year, I actually played. I put a lot of money (for me) into that market. I even got into margin.

At one point, I can remember watching a stock drop suddenly, unforeseen, leaving me that day, $25,000 in the hole beyond the $15,000 I had into that stock. Bummer. But, you have until a margin call, before you really have to worry. And hey, maybe there won't BE a margin call.

So, you sweat it out. So, I sweat it out.

For three nights, I lied next to my beautiful wife, staring at the ceiling; images of horrible debentures, dancing in my head. Each day, I got up more exhausted then the last and commuted an hour to Seattle, trying harder each day not to show the stress; not to kill myself or anyone else, on the highway. My wife asked me, it being patently obvious, what was wrong. I said, nothing, just work stuff. A few friends at work, following my escapades, learned as I went along, or tried their own formulas.

In the end, on the third day, the price of the stock rose. I waited. It continued up. I waited until it went up just enough so that I covered my margin and any transactions fees, and immediately put in a sell. It was still going up, and it took quickly. Then it stopped going up. Then it started going back down.

I relaxed and slept well that night. My positive, happy demeanor returned, and my wife was happy to see me smiling again. I realized, how lucky I was. The down side could have been very ugly. No house. Even no wife (who knows?). I never went on margin again. Maybe once or twice to be honest, but only as far as I could cover. Basically, I don't use margin. Its like going to a loan shark funded by Tony Soprano. Its taking a hell of a chance, and well, its not a good group to be in debt to.

So, though I made money back, though I used that money to buy a new house with some acreage, I backed out of day trading. I got more into my company 401k. I started paying attention to it instead. I started paying attention to U.S. and world politics and monetary fluctuations.

The point....

Some years ago, after 2000, I had heard things weren't going too well and perhaps, we could be in a "situation" shortly. I heard a guy, labeled "Dr. Doom" for his negative attitude about world economy, saying that we were headed to a downturn. I thought about that. And I got onto my 401k manager site and moved ALL my money into bonds. I was still paying into it out of my paychecks; my totals continued to increase, albeit at a much slower rate.

Within a month or so, everyone was complaining about their own 401k's. A few months later, I got into a discussion with friends at work about it and I offered my own complaint. I was really, REALLY annoyed, I said. MY 401k wasn't making ANY money; it was staying at the same amount, month after month. And I was still paying INTO it, so it should at LEAST go up a little. Right?

They all, in one move, turned their heads to me and someone said, "What are you complaining about? My 401k has dropped thousands of dollars." Another said they lost even more. Someone said I was doing really well, and HOW did I manage that. So I told them, a few months ago I pulled everything and put it in bonds. I felt bad for them. But later I reflected on that talk and realized, I was sorry for them but pretty ecstatic for myself and family.

Thanks Dr. Doom.

I continued after that to play with the 401k. I eventually moved all my money into international stocks. And did well, as the US stocks were barely moving. After a while, the international stocks slowed and US were doing better, and I moved mostly into US stocks. Later, both stocks were about even. That was when I used a kind of Occultist program on the 401k web site. You give a bit of your info, and it calculates what you should select for your 401k.

Not trusting it much, I went through the process and did whatever it said. It selected for me, about eight different funds, bonds, etc. Over time, I can now tell you, it worked for me very well. In good times, I will probably use it again.

But let's get to the point, let's get to, today. I just listed to economist, Dr. Nouriel Roubini, better known as "Dr. Doom". He said, he would call himself, "Dr. Realist". He is author of, "Crisis Economics - A crash course in the Future of Finance" (with Stephen Mihm).

He believes that capitalism, is always going to be in crisis. He paraphrased Winston Churchill as, "Capitalism is the worst economic system apart from the alternative. We tried communism, it didn't work; but we need a [proper] market system." He predicted a great deal of the bad things that have actually happened in the five years since he first said them.

Dr. Roubini said that over the next few months, the market is going to have to take a downturn, into a market correction. He said that last time he said something like this, history showed he was actually being optimistic, although everyone had said he was being pessimistic. He was being, Dr. Doom.

So, Doom said that in 2006 when he predicted home prices would fall 20% they actually fell 30%; and his 50% fall in home sales was actually 80%. So, believe him or not, he knows SOME thing. I think what's important here, isn't his degree of correctness but his correctness of a trend.

So now he is saying that the market will need to do a correction over the next few months of perhaps 10%; even the risk of a double dip recession (I don't have a clue what that is, but I don't like the sound of it). He said there could be a bear market for the next few months.

All the major US indices were negative. For the week the Dow Jones Industrial Average dropped -426.77 points or -4.02%. The Standard & Poor's 500 Index dropped -47.99 points or -4.23%, while the Nasdaq Composite dropped -117.81 points or -5.02%. It already looks rough, don't you think?

What am I now going to do? I could wait and once I see the turn start in the market, put all my 401k back into bonds as I did last time. When it starts coming out of it, I'll go back to the calculator. But should I wait? The market dropped over 400 points last week. Will it go up a bit on Monday? Maybe.

The big question now is, what are you going to do?

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