“The market is down, the market is down,” shouted the reporter to the next; “soon, who knows, the sky, surely, the sky will fall;” the reporter concludes. Distributors of news batter their listeners with riles of negativity: Lehman Brothers is seeking relief and protection in bankruptcy; as a result thousands of Lehman employees are out of work, Bank of America purchased Merrill Lynch; HP has laid off thousands, the country is in the mist of a colossal financial catastrophe. Political office contenders blame lack of regulation or offer, if elected to clean up the Wall Street mess; all bemoan the interest of the average investor; the common middle class innocent, the holder of equity, bonds, or other tradable instruments.
Am I to understand that we Americans are ignoramuses? That we cannot read, analyze, comprehend, make a decision, and manage the results of our actions. If there is someone out there in, ‘investor world’ who thinks that betting on equities, public or private, bonds, options, or any other financial instrument is not innately full of risk than they are ignorant of worldly basics.
Greed is the motivator of excessive risk; excessive risk can only, with exactness, be determined in arrears. Every investor private or institutional must balance the risk of principle loss with premium gain; if the investor wins the premium and holds the principle then the investor is a genius. If the contrary rings true than the investor is an idiot. The market is unconcerned as to which outcome; the market simply demands movement.
Today financial crises was created by low interest rates offered to the undeserving, fraudulent lender applications, fraudulent to imprudent lending practices, regulators and legislators who stuck their head in the sand, Fannie & Freddie silliness- operational improprieties-statutorily compliant political payoffs, and a belief system that valued stock appreciation over good sense.
For a time, Mr. & Mrs. Average Joe was rich, banks lent them lots of cash, credit card companies increased limits, and buying a car was as easy as grocery shopping. People of means and those without means flipped the buy and sell of houses like pancakes. There were numerous sophisticated reasons offered and accepted for the real estate bonanza. There were no complaints; Wall Street regulations were, like baby bear, just right, brokerage firms were managed by very smart people while commodity prices soared. Now, in real time, properties are overvalued, bank lending guidelines are that of a drunken sailor, credit card issuers are loan sharks, and buying a car has nothing in common with grocery shopping. Naturally, the country needs more regulations; the brokerage firms are no more than flamboyant speculators, and those professional harbingers should all be thrown into the East River. It is amazing, investors are so whimsical.
A lesson in the fundamentals of all markets: What goes up will come down; what is down will go up or not. If one is to play the game of investments one is speculating on a positive outcome; one is paid a return on investment proportional to the risk of principle. If you don’t like the parameters of the specific risk don’t make the bet; don’t play the game.
To end with some good news: Real estate is a commodity; it is also a significant tax basis for government. Property value is the measure of property tax. Depending on the community the tax fluctuates roughly between 1-3%; governments are empowered by the increased value of property; the high valuations prompt governments to hire more, they insist on doing more, and without a doubt spend more. Therefore, lower property values interrupt into lower property tax and less tax disables the reach of government excess.
Oh, one more thing the market will recover, the sky will not fall, and life will go on…