The media bombard investors with a constant stream of news items, creating anxieties and sometimes encouraging impulses to take unnecessary actions. I once read that a peasant working in the fields during the Middle Ages received as many news items in a lifetime as are contained in a single issue of the New York Times .
Certainly, with the aid of the Internet, we receive much more information than was ever inflicted on our parents. With the stock market playing a greater role in our finances than it did in theirs, this tends to create emotional needs that lead to nervous trading and poor returns. A commodity broker once told me that his peers competed with each other to see how long they could keep open hyperactive discretionary accounts before the account went to zero.
I have written here about a hypothetical “Anxiety Index,” whose peaks and bottoms would mark turning points in the stock market when investors have the largest feelings of certainty and the least anxiety, as well as the reverse. At the height of the dot.com boom ten years ago, unworried investors cheerfully bid up Internet stocks to multiples of hundreds times their earnings or imaginary earnings.
At the other extreme, three years ago, many investors behaved as if the stock market were going to zero, just before it began its 70% climb to today’s levels. Presently, investors seem largely uncertain, understandably so with memories of these market swings still vivid and the realities of today’s housing inventories and jobless figures all too evident. With a truly global economy now a lasting reality and worldwide global recovery stumbling forward, stocks remain challenging but rewarding.
The warm reception to the “Initial Public Offering” of “new” General Motors displayed some developing investor confidence or, at least, a willingness to forgive and forget. The GM bankruptcy eliminated a lot of financial liabilities but didn’t purge the complacent management that allowed this former world leader to slide into ruin, typically blaming their failures on “the Unions.”
The UAW did force GM into a menu of benefits that inspired employees to nickname their company “Generous Motors.” Many lost much of their savings when the bankruptcy took “old” GM stock to zero value. The New York Times interviewed some of these and one gentleman, who had worked on the line for 36 years, calculated that his GM stock losses gave him a capital gain carryover loss that will last him for 73 years. At the annual loss limitation of $3,000, he lost $219,000.
Five percent of the new IPO was set aside for retired or present employees. GM will probably recover and I hope it will produce capital gains for its retired stockholders, but it faces global overcapacity in manufacturing vehicles. AutoLiv (ALV-$75) and Johnson Controls (JCI-$36), two leading providers of components to automakers, have more promising records of growth during challenging times.
I wish good fortune to the retired GM employees who did not let their personal experiences blind them to the opportunities that stocks, even GM, present today. Investors often err in letting their past experience cloud their judgments toward new opportunities. Mark Twain said, “The cat, having sat upon a hot stove lid, will not sit upon a hot stove lid again. But he won’t sit upon a cold stove lid, either.”
Safeguard Scientifics (SFE-$15), which provides capital and other resources to emerging technology and life science companies, had a wild ride during the dot.com boom. It soared over $400, and then slumped to a couple of dollars. Today, it has partial ownership of 17 “partner companies” including one (Clarient) that is being bought by General Electric. Its balance sheet has strengthened over the past year and its stock provides an attractive diversified opportunity to anticipate gains as the economy and the market improve.
The market is still in a technical correction and investors should make new buys with caution. Buying momentum seems only paused and I continue to expect the DJIA to reach 12,000 by year-end.