In the first phase of a devastating bear market, such as early 2008, analysts always say, “Don’t panic. No one ever made money panicking.”
My reply is that panicking is very productive at times. Panic is a protective response built into all life forms. It triggers the flow of adrenalin, which initiates a “fight or flight” response giving you either more speed when running away, or more energy to fight and make decisions.
At Dohmen Capital, we have always advised at the start of bear markets that the earlier an investor ‘panics,’ the more of his wealth he saves.
Panicking can save you from financial ruin. The chart of the very broad NYSE Composit, which contains all the stocks on the NYSE, shows the great times to panic over the past 16 years.
If you panicked in February 2008, when rumors of the problems of Bear Stearns grew in intensity, you would have saved a bundle.
Bear Sterns’ stock was trading at $93. One month later it was ‘sold’ to JPMorgan at $2 per share. That was even less than 7% of Bear Stearns' market value just two days before.
Bear Sterns had traded at $172 per share in January 2007.
And if you had followed my warnings in the Wellington Letter of a monumental global crisis to occur in 2008, panicking would have caused you to sell all stocks at that time, six months before the Lehman Brothers demise that shook the financial markets.
Lehman Brothers had already declined substantially into June 2008, and was trading around $25. Then there were talks of other firms, like the Korean Development Bank, coming to the rescue which gave shareholders false hope. Had you sold in June 2008, you would have saved a lot, because three months later Lehman’s stock price fell to zero.
The key to success: do not procrastinate. Don’t have faith in what people with big conflicts of interest tell you on television.
I predict that ahead of large company failures over the next two years, there will be rumors of Chinese firms coming to the rescue. I would not be swayed by those rumors.
I predict that one country after another will go into financial crisis over the next two years. Conditions this time are so much more serious than in 2008, as I explained in my previous article. Of course, that is opposite to what economists tell you. I discuss the true facts in the Wellington Letter.
Wall Street firms now give a recession still less than a 20%-50% probability. Two months ago, they gave it 0% probability. Do they not recognize that the recession has already started?
The bulls say that not one Wall Street economist agrees that a recession has started. The fact is that Wall Street has not forecasted one of the last eight recessions: NONE.
Neither has the Federal Reserve. When they don’t share my view, it makes me feel comfortable in my forecasts.
My works suggests that eventually the Great Recession of 2016-2017 will be determined to have started in December 2015.
In December 2007, I wrote“The Recession Has Started.” Not one Wall Street economist agreed. In fact, in the early 2008 survey of 17 top Wall Street capital strategists not one predicted that the stock market would have any decline for 2008. I predicted a devastating financial crisis and even wrote my book in 2007, Prelude To Meltdown. I had never wanted to write a financial book, but I was so certain while the media was still hyping the bull market.
One year later, the official arbiter of recessions (NBER) officially determined that the recession had started exactly in December 2007.
I didn't write the above to pat myself on the back, but to point out that the pleasant forecasts from top economists should not lull you into complacency.
What was the stock market prediction in 2015 and for 2016 of Wall Street? Here is what Marketwatch.com writes:
“At this time last year (January 2015), the strategists had pegged the S&P 500 ending 2015 at an average of 2,201.”
But the S&P 500 actually finished 2015 with a 0.7% loss for the year.
What do they say about 2016? The survey of 17 Wall Strategists by USA Today (different than the Marketwatch.com survey) showed that not one predicted a decline or a bear market for 2016. The average year-end 2016 for the S&P 500 was 2,215.
The S&P 500 is now at 1,850. That would be almost a 20% rise from here to hit their forecast. When pigs fly, I say.
Over 40 years of experience in the markets, trading my own money, have shown me that when everyone on Wall Street is bullish, it pays to be bearish.
Conclusion: When someone gives you free advice, always see what their conflicts of interest might be. The best guidance usually has a higher price. Why? Because it’s worth it.
