Wall Street’s Fear and Reality

Back when the selling was unrelenting a lot of people got very scared, there were very emotional comments left on this blog along with many other sites a I read. People felt (and maybe they still do) that stocks are a scam or don’t work and that many stocks would be going to zero as this is “clearly” the second coming of the great depression or worse.

Throughout the ordeal, actually long before it started, I tried to brace myself, my firm’s clients and blog readers for what could be coming. While I certainly got many details wrong the vast majority of truisms that I rely on and wrote about panned out one way or another. Things like denial of the turn to bear, certain types of stocks (like industrials and materials) going down a lot during bear markets, usually much more than the broad market. Also part of the process is big rallies that turn out to be head fakes until one of them turns out to be the real thing. Also part of this every time is rampant fear about this time being different and how the past episodes were obviously not that bad.

All of these things repeat every time, albeit with different details, and for some people there is simply no getting them to realize it.

Regardless of what comes next, take a look at a bunch of stocks you follow or have simply heard of and look at a good cross section. Here are some examples. Deere & Co (DE) fell from about $94 down to $25 at the March low and has rallied 88% up to $47. BHP Billiton (BHP) dropped from about $95 down to $24 at its low and has more than doubled to $52. Royal Bank of Canada (RY) dropped from $59 down to $22 and has rallied 72% to $38. Transocean (RIG) dropped from $161 down to $42 at its low and has gone up 76% to $74. Even Starbucks (SBUX) has rallied 75% from its low.

I don’t own any of those names they are just random examples. Just as hideous declines every so often are normal so are massive snapbacks up to a point. In trying to convey that this time was not different no matter how scary it might have been or might yet become I think a better way to phrase it might be to say that for the overwhelming majority of companies it will not be different. For Fannie (FNM), Freddie (FRE) and AIG this time was different, in the last big one it was different for Worldcom and Exodus Communications et al but for most others it was not different.

As an example RIG probably going to be a big energy services provider for a very long time and RY is going to be a big Canadian bank for a very long time regardless of whether either one is a good stock pick or not. While it is reasonable to have your confidence shaken when a stock you own drops 75% most of the non-financial stocks that dropped that much in this bear market were simply never headed to zero and will at some point make a new high.

This should not be taken as an argument for buy and hold because I believe in trying to avoid declines like this at the portfolio level. The point, and it is easier to make now than it was two months ago is that the fear triggered by these events always exceeds the reality. In 2002 many tech companies with no revenue went bust and they were the vast majority failures. On this go around many financial companies that were too reckless (or whatever description you prefer) will fail and they will be the vast majority of failures.

Reading this now you might agree with me about fear exceeding reality but some of the people that do see my point now will forget on the next go around. Obviously some reading this will think I am 180 degrees wrong about this and for those folks they might want to take some of their 70-80% bounce names off the table right now.

About Roger Nusbaum 169 Articles

Roger Nusbaum is an Arizona-based financial advisor who builds and manages client portfolios using a mix of individual stocks and ETFs. Roger writes a popular blog, which focuses on risk management, foreign stocks, exchange traded funds, options etc.

Roger has been recognized by many in the investment management industry for his expertise in portfolio management. Roger has been regularly interviewed by the financial press, trade journals, and television news shows. He has also had numerous technical articles published and has been quoted in a number of professional trade journals, newspapers, and consumer finance magazines. He appears frequently on CNBC Asia as a market commentator.

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