One's finances

It doesn't take a financial professional to understand how dreadful US financial markets are right now:

Equity indices, otherwise known as the stock market, (the Dow Jones Industrial Average, the Nasdaq, the S&P 500, and the Russell 1000 among others), as of Friday, are down just over 20% off their October '07 highs, and just 2% over their July '08 lows, after our brief mid-July through August rally. 

In fixed income, corporate and junk bonds are trading at a huge advantage over T-bills, the 10-year note as of Friday offered 3.658%. 

In perhaps the most major plus to consumers, but a major drag on hedge-, pension- and some mutual-funds for late summer, West Texas Intermediate, the futures contract most directly responsible for setting the price of oil, traded both globally and on the floor at exchanges such as the New York's Nymex and Chicago's Merc, is down 27% from it's highs, along with many other commodities, including inflation-proof gold, recently around $797 per troy ounce, down more than 20% from its recent highs. 

In this climate, what is an investor to do? 

With such ferocious swings in the stock markets, many investors find stocks too volatile for their liking. 

However, most individual investors aren't learned enough to understand how to invest in commodities themselves—and even if you could, you would've lost a lot of money doing so over the past month and a half, when even the masters of the universe, hedge funds, lost money in commodities. ETFs offer a portfolio direct exposure to commodities, some short, some long, and can be a great way to profit, but they are extremely risky. Unless you have quite a clear picture, I wouldn't recommend using them. I went short an oil-heavy commodities ETF when oil was trading at $130, and although I kept it as a long-term hold, I didn't get as much profit as I could have—not to mention all the worried nights when oil was $15 over my short entry! (And that was a mistake coming from someone who is daily involved in the markets!)

As individual investors, we lack the crucial connection that comes from working alongside Wall Street analysts and traders at the investment banks and hedge funds. Although there are most assuredly pluses to not being on Wall Street, the extreme stress for one, there are negatives, too. Information—in the form of those pesky rumors that run amok on the floors of the exchanges—comes to other investors far too late, and we often miss those quick bucks made on opportunity trades. 

For example, I have a friend who was on the exchange floor when Hewlett-Packard announced it was going to acquire EDS Systems back in May of 2008. I was personally holding thousands of shares of HPQ common shares in anticipation of good earnings, however, the EDS rumor sent the share price falling through the floor. Luckily another investor who happened to know I was in on HPQ texted me to make sure I was seeing it and to tell me that he thought it was showing support for a floor about 5% beneath what I could currently sell it for, and 7% beneath what I'd bought it for. I sold it, losing 4%. I should've used that opportunity—I was even telling myself to do it—to buy more of it once it had been beaten down into the ground. Promptly, over the next two days, it rode up 10.5%! 

A true opportunist, the floor trader, could have very easily and foreseeably been fortunate enough to have seen the commotion caused by the HPQ rumor, while it was being rumored on the floor—(not reading the rumor on a ticker ten minutes later), and could've gone short with tens or hundreds of thousands of shares, then buying them back to cover, then buying them back to go long to ride it back up. 

A good investor has to understand the information behind a particular move in a share's price. Why did it gain 2% today, why did it lose 20% over the weekend? These are questions that a good investor should have the answers to before even being asked. 

A 2% daily gain might come from a particular analyst advising his clients to buy, via an upgrade on its rating. A 20% move lower on a weekend can come from an unexpected announcement, for instance if the CEO comes out and tells the public he's going to miss this quarter's original expectations, or, recently, you happen to be talking about any financial-services companies. If you're in the financials, expect daily swings of 20%. 

For example, Ambac Financial (ABK) and MBIA Inc (MBIA) shares, (among other financial shares), are a perfect instance of good opportunities for trading. A good investor could've started shorting ABK and MBIA in November '07, knowing that the credit crunch would hurt the re-insurers, when ABK and MBIA were above $50/share. 

When ABK got down to $1 a share in July, he/she would promptly cover his shorts, and buy as much as he/she could get their hands on, knowing that they would restructure, acquire capital, and be back up running in a year or two. The re-insurers, everyone knows, are essential to credit markets, and thus, many analysts were telling their clients that they would recover before much of the rest of the financial shares would. And they would be right, with an opportunity to sell those shares this past week for more than $9 each—an 800% return-on-investment, a magical miracle rarely heard of that turns every $1 dollar invested into $9 dollars. 

I don't say any of this to make you feel like you suck because your portfolio is down 20%. I just want to let my fellow individual investors know that there are tons of opportunities right now. The main article in August 2008's Bloomberg Markets is entitled "Why Buffett is Buying." Don't take it from me, take it from the Oracle of Omaha. Hell, if thrifty Warren Buffett sees reasons to be buying right now, surely you should! 

I would especially be looking for long-term buys in emerging markets via the dozens of EM ETFs out there. This past Thursday's Financial Times had an article with a quote in it I liked: "Long term, there is no reason to believe that emerging markets will not continue to grow more strongly than developed nations." 

So what if the indices are down right now, they're actually presenting better opportunities now than previously! Get in there and buy, and in one, five, ten years from now you'll thank yourself. 

Sir John Templeton, a short while after the 1929 crash, went into the New York Stock Exchange and bought 100 shares of any stock trading at under $1. He infamously spent the rest of his years running many multi-billion dollar Templeton funds out of his home office in Bermuda! Remember, other individual investors out there, that equities markets historically start to signal an economic rebound three-to-sixth months before the numbers start rolling in. The equities markets are forward-looking indicators!

Let's man up, investors! Whenever a hedge fund fails, you know it's going to tear apart things, and when the New York, commodities-based $3 billion dollar Ospraie Fund keeled over, it was a sign to me, and several other investors, that commodities weren't up for a huge rally any time soon, and that we all need to buy, buy, buy!