Small Business Boomers

What you want

If you’re a boomer you probably have stock investments.  Either you have them personally or indirectly through a mutual fund or a pension plan.  You want them to do two things if you know it or not.  First, you want them to preserve your capital.  Don’t loose my money.  Second, you want them to give you a return either through price appreciation, growth, or by throwing off cash, dividends.  Now, give me five, eight or ten percent return on my money.

If you are aware of your position then the past week in the stock marketing has been sobering at least.  The question becomes “How well do you sleep at night in this market environment?”  If you had Emron, then maybe not all that well.

What you get

Think about the contradictory nature of your investment requirements.  How much of your money are you willing to risk loosing for a given return on your investment?  Lately your money and everybody else’s have bee chasing that higher rate.  You may not have realized that when you took your money out of a fund that yielded 4% and put it in one that did 8% you were increasing the risk to your capital.

Money managers aren’t stupid.  To grow their funds or just keep even they need to offer invest vehicles with higher and higher rates of return.  Hedge funds get into all sorts of esoteric stuff.  This all works well for awhile.  At some point even these high rollers wake up and say that risks have gotten too high.  At that point things at the fringes of the financial world begin to unravel.

What it means to you

Most of the time the average investor and the conservative portfolio managers can say, so what.  The losses of these gamblers don’t have any impact on the central value of the economy.  At some point the losses in these strange bets become so large that the players have to liquidate more mundane assets to cover their losses.  At that point the average investor takes a hit.

Because the guy who is chasing a 20% return has to sell his covering assets the guy who wants a 5% return gets it in the neck when his holdings drop.  Now, investment analysts say that when the stocks drop this is a buying opportunity.  Maybe, if you believe that the high roller has solidified his position and will not be required to sell any more assets to cover his losses.  If you know where that bottom is stop reading this article and start buying stock.

The problem is knowing when all the speculators have been driven from the market or turned into average investors.  Think real estate and these three scenarios.  I buy a house and live in it.  I buy a house and rent it out.  I buy a house with the intent of selling it a month later.

The balance of fear and greed has been disrupted.

Where the trouble comes in

Regardless of how I finance any of the purchases I move from home owner to investor to speculator.  My finance option for any of these transactions only comes into play if I cannot pay the service (lender’s payment policy) on the loan or the investment goes under water (value is lower than my purchase price).  In either case I may decide to sell the property.  If there are a significant number of people in the same boat the value of the property and real estate in general declines.

Here is where panic sets in.  Every seller is potentially loosing money.  Those that don’t have to sell generally stay pat.  Those that have to sell keep dropping their price until they get a buyer.  Everyone starts feeling for the bottom.  Nobody can feel it.  Buyers don’t want to buy because they think their purchase will go down in value even as the close the deal.

About now you get statements from experts predicting when the market is going to turn around.  The only time the market turns around is when all the excess capacity and speculative psychology has been rung out.  When all the speculators who stayed too long in the market have lost a large amount of money, then and only then will the market turn back up because the bottom has been reached.  Interestingly, it also is the time all the experts have decided to keep their mouths shut.

Listen for the silence.  Fear and greed have come back into balance.

You are thinking that doesn’t apply to you.  Except that the price drop caused by the speculators has impacted the value of your assets; house, stock, commodities.  You didn’t change the market, but the market change around you.  Your investments became riskier and you never knew. 

What’s the answer? 

There are several which I will go over next time.  Stay tuned.

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