If the Bailout Should Fail

Remember these words:

“It would be a mistake to be buying anything now if the government was going to walk away from the Paulson proposal… There is no Plan B”.

Those are the words of Warren Buffett. A man who has his money where his mouth is. Buffett seems to have a lot of faith in America, in its Government, in Hank Paulson and definitely in his old Wall Street associates, Goldman Sachs.

But one thing should remain crystal clear. This is not a matter of recession or no recession. This is a matter of depression or a recession. In the event that the bailout would not go through, in the words of the greatest investor in the world “The entire financial system would break down and take years to restructure”.

It seems that investors should have one fundamental question on their minds: Will the bailout go through or not. If it doesn’t the financial system is obsolete and we have a breakdown 1929-32 style: The Dow loses 90% and everything starts over. If it does all work out then we have inflation 1970s style, possibly worse ($1 trillion is a lot), the Dow has a standard consolidation that lasts a few years and the economy sucks for a while.

Thus, we look at the Dow. What the stock market is saying is “I don’t want to be a seller. I want to buy and hold, even if my gains aren’t all that good”. The simple these are mostly the same investors who bought when things were attractive in the first place. Consider the fact that they may still be getting 8-10% on dividends, why should they sell? You’ll never hear any value investor tell you he wants the Dow to go to 20,000. That’s preposterous! Why would he want the only asset he knows to buy cheaply rise in value?

But then there is the speculative crowd. And I say speculative not because they don’t know what they’re buying, many do. But because they buy for appreciation. They believe the Dow will soon go to 20,000, and they want it to. They buy and hold betting that tomorrow some new idiot will come and buy their stock at a premium to their cost. These are the people who will be selling when the sailing gets tough, because their ships are made of cardboard. They will sell and they will be the ones to send the Dow down, possibly to 8,000. Furthermore, they won’t have the gall or bladder to buy at such times. Investors will for once in many years be euphoric.

In the meantime stocks are in a rush-hour-like grid-lock. Speculators won’t sell because its against the whole foolish buy-and-hold mentality they live with. Investors won’t sell a) because they haven’t been buying in ages, b) they already would have, or c) they are the new bulls, ready to step in as soon as things get bloody. Short sellers are out of part of the game altogether.

How do I know all this? Simple: Silver. I owned it from 21 all the way down to 10.50. Does it hurt? Well that depends. If you are out of a job with your life savings invested then probably. If you are a working man, putting more and more of your life’s toil into hard assets, it will mpay off immensely over the long run, so why worry?

The Dow right now should be priced at about 8,000 if it were looking 5 years out. But it isn’t. The market is looking at the next few days. Yes bailout or no bailout. As soon as that’s confirmed, hopefully that there will be a bailout and that the economy will only experience a bad recession at worst, then the next issue is for the Mice and the Buffalo.

The Mice are the risk-takers. The ones who thought they have their cheese and eat it too. They put too much money into too short-term of a gamble and lost. They will sell not because they want to but because they have to.

Buffalo travel in herds. Buy-and-hold today, run for the hills tomorrow. These folk would be better off owning gold. Its just as stupid as they are. They make when everyone makes more and lose more when the smart money takes losses.

It’s Caveat Emptor as they say in Latin, or Buyer Beware. Maybe they should say Seller Beware.

You can’t always change lanes while driving even though the other lane is better ,so too with investing. Sometimes you have to swallow losses. But don’t sell because others are. That’s juts plain foolish. And we are, or at least would love to think we are, Intelligent Investors.


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