Are some of the lessons learned during that chaotic time now applicable?
Gerald Loeb wrote The Battle for Investment Survival in 1935 in response to the great stock market sell-off of 1929 that spawned ten years of economic turmoil. In it he cautioned that “it’s a great mistake to think that what goes down must come back up.”
The 10% Rule
Investors, reeling from losses in nearly every sector, are searching for protection. For some it may be too late, but for others, there is the ten percent rule. Simply stated,
Loeb suggests that a drop of 10% or more in a new investment requires a new reality. The old buy-and-hold theory should be shelved in favor of disaster insurance.
The ten percent rule offers an exit strategy while leaving funds for future investments in a more favorable environment.
The orderly sell-off in U.S. equities suggests further losses. Many had been hoping for capitulation, panic selling on high volume with dramatic price declines.
Capitulation is usually triggered by some shock to the economic system and, for some, is a signal of a bottom in prices.
Bailout or Bust
But the talk of an insolvent U.S. financial system and daily bailouts of major money center banks and institutions deemed too big too fail hasn’t produced panic selling, instead a daily erosion in confidence, trust and prices has occurred.
Feeble rallies are met with selling pressure. Dividends are slashed, but management remains in place.
Rearranging the chairs on the Titanic didn’t prevent the sinking of the ship, nor will pouring billions of taxpayer dollars remove the tarnish from once-sterling operation.
Tough love may be the only answer. That’s the prescription the U.S would give to other countries suffering financial fractures.
Instead of the piecemeal rescue of a billion dollars here and a billion there and rewarding bad behavior, nationalize the banking system and close down the losers.
Restructure the winners and, in time, sell those banks to the private sector. It worked in the 1980s and the Savings and Loan crisis, why not now?
Bring regulation into the 21st century, taking into account the global nature of our economy and the interconnectedness of all global financial entities. Admit that free-market capitalism needs some regulation to weed out greed and bad management.
Only then will trust be restored and confidence return to investing. Until then, look for prices to continue their descent into irrelevancy and get out when another ten percent loss is registered.