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December 23, 2008 Liquidation Sale - Everything 50% Off!
- Rarely does someone else’s liquidation sale prompt us as consumers to liquidate our own holdings. But - recently many investors have joined the selling frenzy, rather than look for bargains to buy. Irrational behavior at its most obvious.
- All Pension Partners, LLC clients are what I consider “real money” investors. So what are “real money” investors?
Today we are going to speak about what has been going on in the stock and bond markets here in October and November of 2008. What is going on is what I call liquidation sales.
When a store (or any other business) closes its doors and all assets are sold/auctioned off; it is called a liquidation sale.
These sales, sad for the seller, create opportunity for the buyer. Seasoned shoppers – those who are knowledgeable about what the merchandise being liquidated ‘usually’ costs – become excited about finding and buying good, quality items at deeply discounted prices.
Rarely does someone else’s liquidation sale prompt us as consumers to liquidate our own holdings even if we might have paid more for the same or similar assets in the recent past.
Quite the opposite – If we have the cash, we buy more. Liquidation sales are always for cash.
Investors join the selling frenzy
These recent weeks have witnessed many investors having exactly the opposite reaction to liquidation sales of financial assets. They are drawn to join the selling frenzy, rather than look for bargains to buy. Irrational behavior at its most obvious.
The liquidation sales have been made by various holders of financial assets – Investment banks, banks, hedge funds, investment funds, etc…
These holders are either going out of business due to excessive debt or forced to shrink the size of their portfolios due to customer defections.
Forced sellers must sell, usually at any price!
“Real money” investors are never forced sellers
All Pension Partners LLC clients are what I consider “real money” investors.
A “real money” investor:
- Owns the investments outright, without debt
- Has a longer-term time horizon
- Has good liquidity (cash) in the portfolio.
The above ensures that you are never a “forced seller” or forced into a liquidation sale.
It is strange to observe that many investors who hold diversified portfolios of financial assets suddenly feel a need to compete with the forced sellers in a crowded marketplace – thereby forcing prices even lower!
But that is exactly what happened in early October through November of 2008.
Bulk of the decline likely behind us
Many of you have asked me, “Is it over yet?”
Though there are no shortages of opinions about this, nobody really knows the answer.
I do know that the top to bottom decline of the S&P 500 from the 10/09/2007 peak to the 10/27/2008 recent low was about – 46%. This ranks the decline as the third biggest decline in the post WWII era.
No decline has been greater than 50% in the last 65 years. Not one.
This suggests that the bulk of the decline is behind us, not in front of us.
Central banks and governments around the globe are fighting the financial crisis and in January, the country will have new leadership.
It is not the time to join panicky sellers.
Eventually, fears subside, and the focus shifts back to fundamentals and values.
What else do we know?
Risk assets in the U.S. and throughout the world are cheaper than usual, because prices have declined so sharply during 2008.
By virtue of this cheapness, we believe the probabilities of favorable financial outcomes for today’s buyers of financial assets are much improved compared to most times.
We have the same belief for current holders of financial assets.
I appreciate your time - and in our next segment, we will be speaking about the “Lost Decade,” the decade from 1998 to 2008.
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