Newsletter – March / April 2008 – Investor Amnesia?

Investor Amnesia?

The majority of investors have such short memories. Do you have investors’ amnesia? To find out, take this simple test:

QUESTION: Do you remember the “cover story” for the August 2007 stock market sell off? (The market dropped about 13% in 4 weeks.)

ANSWER: The sub-prime mortgage story. American home-buyers had been hustled into borrowing more money than they could afford at artificially low interest rates. When their mortgage rates bounce up to normal, millions of them could not afford to live in their homes and mortgage defaults started happening everywhere. Home prices has started to tumble.

QUESTION: Do you remember the cover story for the January 2008 stock market sell off? (The stock market dropped about 13% in 12 days!)

ANSWER: [a] Sub-prime +: it appeared that many many banks all over the world bought billions and billions of dollars of these junk mortgages. They bought so much that the US mortgage collapse threatened the banks themselves! Central banks in Canada and in Europe were stepping in to bail the big banks out. The problem was worse than they thought.

ANSWER: [b] The US economy was slipping into a recession. Corporate earnings would be lower. Unemployment would be higher. Imagine the possibility that the stock markets might stabilize now, or bounce up, as they did after the August 2007 sell off. And imagine they might have another sell-off into autumn 2008.