Investors Need Patience During Economic Recovery

To at least a small degree this attitude seems to have infected nearly all of us, including me. Doesn't it feel like we've been in a credit crisis for ages? That real estate prices have been plunging and subprime borrowers defaulting for years? And that molasses would have dried by the time the housing and financial sectors bottomed?

How about this for a trip down memory lane: On June 22 of last year, less than a year ago, Blackstone Group (BX) went public at $31 a share. On July 19 the Dow Jones Industrial average topped 14,000 for the first time. During the first six months of 2007, subprime loans were being handed out like candy and investors were snapping up mortgage backed securities.

Just a year ago, so many investors were clamoring for a chance to get into the bull market that I wrote a column called "Buying Strategies for the Current Bull Market." I loaded the column with disclaimers, all but begging readers not to buy. I said it was the antithesis of the Common Sense approach to buy when stocks were at record highs. And yet I succumbed to readers' pleas, offering some tips to squeeze more value out of a richly-priced market. With benefit of hindsight, I should simply have said there are no buying opportunities in this kind of market. Patience was rewarded: By August, just two months a later, a genuine buying opportunity was at hand.

Now I'm hearing the opposite plea from readers: Is it too late to sell, especially financials, home builders, and housing-related stocks? Even this week, when the worst of the mortgage and housing crises seemed to be safely behind us, these stocks have been sinking again, especially after Standard & Poor's downgraded a swath of financial stocks. This time I am not bending to popular demand by offering any selling strategies. The answer, simply put, is that it is too late. A year ago was the time to sell, not now.

That doesn't mean that these stocks don't have farther to fall. No one can say for sure. Some are approaching their lows hit in March, when a crisis atmosphere gripped world financial markets. Such panics are an even worse time to sell, as I said at the time. But the problems of the banking and real estate sectors are complex, interrelated and slow to emerge in full. That a crisis could unfold over months or even years is all but unfathomable for the typical trader. Yet the savings and loans crisis to which the current problems are often compared lasted from approximately 1987 to 1994. About half the nation's savings and loans disappeared.

I've been saying for some time that the current crisis will take considerable time to resolve. (See column of Aug. 28, 2007.) But that doesn't mean the stock market will fall further, or even that the hardest-hit sectors will hit new lows. In the 1990s, the market rallied strongly beginning at the depths of the 1990-91 recession. The question investors should be asking now is not whether to sell, but whether to buy. As I've reported, I've been nibbling at the financial sector, periodically buying Wells Fargo (WFC) and Bank of America (BAC).

I wouldn't rely too much on Monday's S&P downgrades of Morgan Stanley (MS), Lehman Brothers (LEH) and Merrill Lynch (MER). With all due respect for the venerable rating firm, where was S&P (as well as other analysts) a year ago? With merger activity showing signs of awakening and the credit crunch easing slightly, it may soon by time to again nibble at the investment banks, though I don't think we're there yet.

I have some cash on hand from my recent sale of energy and raw materials positions, which is ear-marked for financial and housing-related stocks. Recent drops have made those candidates more attractive. Once again, patience has proven a virtue.

Also See: