We thought you might find this entertaining…
photo by dailyinvention
Heidi is the proprietor of a bar in Detroit.
In order to increase sales, she decides to allow her loyal customers – most of whom are unemployed alcoholics – to drink now, but pay later. She keeps track of the drinks consumed on ledger (thereby granting customers loans).
Word gets around about Heidi’s drink now pay later marketing strategy and as a result, increasing numbers of customers flood into Heidi’s bar and soon she has the largest sales volume for any bar in Detroit…
By providing her customers’ freedom from immediate payment demands, Heidi gets no resistance when she substantially increases her prices for wine and beer, the most consumed beverages. Her sales volume increases massively.
She becomes the most profitable bar in the USA…
A greedy young and dynamic vice-president at the local bank recognizes these customer debts as “valuable future assets” and increases Heidi’s borrowing limit. He sees no reason for undue concern since he has the debts of the unemployed alcoholics as collateral.
At the bank’s corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALKIBONDS and PUKEBONDS. These securities are then bonded together into large packages and gradually upgraded to Triple-A (AAA) “very low risk” packages by greedy bond raters, and then traded on security markets worldwide.
Naive investors don’t really understand the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics.
Nevertheless, their prices continuously climb, and the securities become the top-selling items for some of the nation’s leading brokerage houses.
Eventually, though, Heidi realizes she is not taking in enough cash to make even the minimum monthly loan payments to the bank, so she demands payment from some of her alcoholic patrons. Being unemployed, they cannot pay back their drinking debts. Therefore, Heidi cannot fulfill her loan obligations and claims bankruptcy.
DRINKBONDs and ALKIBONDs drop in price by 90%. PUKEBONDs perform better, stabilizing in price after dropping by 80%.
The decreased bond asset value destroys the banks liquidity and prevents it from issuing new loans.
Retirees, who have worked hard all their lives and invested in these bonds, realize that their savings are all gone. Their money was used to buy drinks for Heidi’s customers for all these years. And now these same retirees can no longer get a loan from the bank to buy a car or take a vacation, because the bank is insolvent and no longer writing any loans.
The suppliers of Heidi’s bar, having granted her generous payment extensions, are faced with writing off her debt and losing over 80% on her bonds. Her wine supplier claims bankruptcy and fires all his staff. Her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 50 additional workers.
The bank and brokerage houses are saved from bankruptcy by the Government, following dramatic round-the-clock negotiations by leaders from both political parties. The funds required for this bailout are obtained by taxes levied on employed middle-class non-drinkers and by reducing benefits to the retirees.
So now you understand why I’m sitting on my porch, staring at my tiny social security check and my empty brokerage statement, and wishing I had been an unemployed drunk all my life…
Written by Dave Young, president
Last week I was look through various stock market charts when my 14-year-old son walked into the room. He asked me what I was looking at.
I thought I would have a teaching moment and began to explain how markets move up and down in cycles. After silently looking at the charts he responded,“If that was my money, I would hang myself!” and walked out of the room.
While I thought his response was a little harsh, I do understand that most investors are very discouraged after such a difficult year.
So how bad has this market been? Consider the following:
—Warren Buffet, considered an icon of wise investing, lost almost half the market value of his accounts between the middle of September and the middle of November.
—Bill Miller, one of the only managers to beat the S&P 500 for the past 15 consecutive calendar years through 2006, is down almost 60 percent year to date through December 3rd.
—Dan Fuss of Loomis Sayles is a renowned bond manager. Bonds are traditionally very conservative and are used to stabilize portfolios. His highly regarded bond fund is down an incredible 28 percent through December 5th. He said this is a “once in a 50-year” buying opportunity.
—Icon Funds, a value-based mutual fund manager, put out a report stating that stocks are 60 percent undervalued.
—High Yield bonds actual default rates are currently at 3.1 percent. However these bonds are currently priced as if the default rate was 17 percent.
Not to understate the obvious, but investment markets are difficult. They do whatever is necessary to cause the most grief to the largest number of people.
The market continuously trains investors to be in the wrong place at the wrong time.
When markets are strong and moving up everyone wants in and is aggressively buying. That is often the wrong time to be putting money into the market.
Conversely, when markets are bad and going down, everyone is selling and no one wants in. That is usually a good time to invest.
Occasionally, you get market conditions that are horrible (like now) and investors are acting irrationally in extreme panic. At this point in the cycle, investors begin to sell at any price. This is the stage when investors begin effectively “giving away” their investment in order to get out of them.
Historically, this has been a phenomenal time to invest and buy new positions. Moving up from extreme lows is when fortunes have been made after previous bear markets.
I believe investors are positioning themselves in the wrong place at the wrong time once again. As evidence, simply look at the record amount of money that has been moving out of stocks and into cash, money markets, bank Cd’s, and fixed annuities. At a time when 30-year treasury bonds are paying a record low 3 percent yield, in a quest for safety, investors are running as fast as they can to lock in those low yields… at just the wrong time.
Looking forward over the next three to five years investors have a choice:
–Invest in money market funds; bank Cd’s, fixed annuities or treasury bonds. These will guarantee returns in the 2 to 4 percent range. Your money is locked up at historically low interest rates for 3 to 7 years with significant surrender charges if you change your mind.
–Invest in a well diversified, strategic portfolio made up of beaten down bonds, stocks and real estate. Our portfolios are currently positioned to capitalize on areas of the market that historically recover the fastest (visit our website www.paragonwealth.com to see examples of recommended portfolios).
This panic has pushed stocks down to the same levels they were 11 years ago. We won’t know until after the bear market has ended that it is over, but we do know that returns after previous bear markets have been exceptional.
Looking backwards or following a “rear view mirror investing” strategy, usually causes an investor to invest in the wrong place at the wrong time.
Our portfolios are currently reallocated based on opportunities going forward. When the market finally turns positive we will continue to adjust our portfolios based on which areas are showing the most strength.