by John M. Curtis
(310) 204-8700

Copyright October 11, 2002
All Rights Reserved.

hirty months into the longest bear market since the great depression, all eyes are looking for a "bottom." With $7 trillion in personal and corporate wealth lost and with many retirements and family estates decimated, it's time to examine Wall Street's claptrap. Conventional wisdom holds that meltdowns occur every four years, but market gurus have explanations for just about everything. Investors are warned not to time the market. Pick companies—or funds—you "believe in" and hang in there for the long haul. Figure out your "risk tolerance" and set long-term "time horizons." During a recent nosedive, headlines on America Online read, "Buffett Bullish on Market . . ." quoting veteran investor Warren Buffett but curiously omitting ". . . if investors have a time-horizon of 25 to 30 years." How many sane investors can risk losing their savings for a generation, believing they'll somehow get it back and cash-out on top? Brokers warn investors not to panic, hang in there and ride out the bad times.

     Long-term investing isn't practiced by Wall Street insiders. Fund-traders typically move in and out of shares in a matter of hours, sometimes minutes, in a process called "arbitraging"—buying on dips or selling on bounces. Yet, most brokers don't time the market for small investors. When the market rises, small investors benefit, as long as they don't cash out during market meltdowns. Here's the paradox for small investors. If they can't time market highs or lows, how can they possibly know when to get in or out? Brokers quote statistical returns to prove investors earn average yields over the long haul. But those same stats don't take into consideration entire fortunes wiped out during catastrophic downturns, like the crash since March 2000. Recent gyrations in the market are directly related to "program buying" or institutional trading on dips, and abrupt selling on bounces, causing the market indexes to rocket upward or spiral downward.

     Wild swings in the DOW don't automatically trigger recoveries in the broader market, especially more speculative technology stocks traded on the Nasdaq. Many investors think their growth portfolios or funds will bounce back, simply because the DOW lurches forward. It's tempting to ignore the broader economy and simply focus on market bottoms. Corporate scandals, lowered earnings, rising bankruptcies, anemic growth, growing deficits, weakened consumer demand and the prospects for war all factor into the market—not simply whether market gurus believe that a "bottom" has been hit. In the backdrop of a weak economy, many "bottoms" occur, from which short-term rallies provide fertile opportunity for market players [arbitragers] to lock in profits. Small investors continue to lose ground because they're constantly fooled by endless ups and downs. Reaching new "bottoms" doesn't necessarily mean that a real, lasting turnaround has taken place.

     Market "recoveries" and "turnarounds" further confuse investors looking for direction. Short-term "recoveries" and "turnarounds" don't automatically signal overall market trends. Investors need to ask how long will rallies, recoveries and turnarounds last. In a weak economy, turnarounds appear permanent, only to find short-term rallies eclipsed by waves of selling. Market analysts frequently attribute short-term rebounds to "bargain hunting," leaving the impression that small investors are swooping up depressed stocks. In reality, programmed buying kicks in on market dips, driving indexes upward until the selling starts again, triggering another downward spiral. Keying on terms like "bottoms," "recoveries," and "turnarounds," investors get seduced into jumping in without considering possible repercussions. Brokerage houses cite "asset allocation," or the mix between cash, bonds and equities, to guide clients toward balancing portfolios. Here comes the real danger. In rising markets, brokers urge up to 80% equities while, in down markets, adjust to 50%, when many investors shouldn't place sizable assets at risk.

      Looking for the proverbial "bottom," many investors assume that when the "bull" returns, they'll rapidly reclaim losses. Binary [all or none] terms like "bull" or "bear" don't indicate whether recoveries will be slow, sustained, short-lived or even in only specific sectors. Investors errantly conclude that short-term buying or selling means the bull or bear has returned. That's why brokers raise the issue of "risk tolerance" and "time horizon." Risk tolerance attempts to ascertain investors' stomach for taking losses. While time horizon helps relieve investors' anxiety by giving rationalization for remaining invested when markets tank. Without going out on a limb, brokers really can't say whether investors will ever recoup losses. But "time horizons" give brokers the leverage to keep clients focused on the future gains, not on today's painful losses. As many know, there's no long-term horizon for companies that go belly up or for seniors whose lives end waiting to reclaim losses. Extraordinary events like "dot-com booms" or "tech bubbles" won't save the market or return anytime soon.

     Wall Street's claptrap needs careful vetting before battered investors squander what's left of life-savings, hoping to recover past misfortunes. Despite massive losses, brokers still warn about the dangers of inflation. Many conservative funds remain far more risky than inflation or allowing "cash" to compound in insured accounts by "the rule of 72." Since the '90s bull market and the popularity of stock mutual funds, investors weren't warned enough about the downside risks of even conservative equity investing. Most families can't allow life-savings to evaporate and wait, as Buffett suggests, 25-30 years to recoup losses. Before brokers hit investors with worries about "inflation," or persuasive buzzwords like "market bottoms," "recoveries," "turnarounds," "risk tolerance," "time horizons" and "long-term investing," they should warn investors about the actual risks associated with stock market. Historic yields don't take into account—or highlight—the carnage experienced by real people when markets crash. Before investors jump back in, they should ask themselves how much can they afford to lose.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's a consultant and expert in strategic communication. He's author of Dodging The Bullet and Operation Charisma.

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