Monday, March 30, 2009

What the average investor can learn from this crisis:

Posted in by Illuminated One | Edit
What the average investor can learn from this crisis: Keep on the lookout for "bubbling" formations

by Grant Martin, 2009 Midwest Voices Guest Columnist

1) Watch for bubble indicators. It is simple: look for people doing irrational things. For instance, running up the price of companies that have no earnings just because “everyone else is doing it”. People buying houses with no money down, readjusting interest rate loans, and waiving home inspections. Putting money into hedge funds that guarantee sky-high returns (okay, us “commoners” probably didn’t know about that one, but some people did!)

2) When bubbles start to form- watch out! Run for the hills. If I can, short anything related to the industry benefitting from the irrationality. If I can’t short, then shift money into gold or cash. Maybe start out slowly- it might take a year or two before the market catches on. But once I notice bubble-like qualities, start getting out. Every month take out 1/12th or so of my money from the market and get it into something safe. And definitely stop putting new money in.

3) After the bubble bursts, start to slowly get back in. Figure a year and a half at least for things to stabilize. Maybe start getting back in after the bad news starts to not affect anyone, as they are used to it and partially numb. Maybe plan to get all my money back in over a year’s time.

4) If I'm not working or am close to retirement, start shifting money into bonds- very safe bonds. Don’t worry about the bonds losing value- just plan to live off the income they generate. I might also think of shifting some of the money into gold and/or cash- but not unless I can stand to lose most of it.

So, I figure next year during the Summertime we will be back in full swing. The market may or may not adjust to that reality months before then or months afterwards. In five years we will talk about the terrible time in 2008 like it was ancient history.

And we will be heading for another bubble.

What will it be this time? I can only guess. Maybe people will be pouring money into “Green” companies that don’t have earnings and while oil is at an all-time low? I don’t know- but watch out for people doing irrational things. And then let me know…