GMO versus GMI
By: Dr. Charles Lieberman
Date: 7/21/2008
Investors react to headlines, mostly out of fear and greed. Right now, they are reacting mostly to fear. Get me out, or GMO, is the operative phrase. It is the traditional response of investors to any sizeable market decline, especially when that decline in blared by the media using inflammatory headlines. It is a direct contrast to GMI, get me in, an instruction used extensively during the tech bubble. Of course, it was not reported as a bubble at the time. But the price rises were taken just as unambiguously as a signal for investors to buy, as the recent price declines have been a trigger for investors to sell. Both GMO and GMI are highly damaging to portfolio values.
Banks, insurance, real estate, and other firms loosely connected to the credit markets have been the subject of dire forecasts for more than a year now, severely depressing stock prices and creating a self-fulfilling prophecy. Investors now watch the market's daily gyrations and jettison long-term investment plans in the face of the pending market collapse that is widely discussed.
Thus, the latest issue of Barron's, with its cover story on buying into banks and other well-placed financial companies, offers some welcome balance. While the large banks will report more losses, most are now laying the foundation for capturing market share from the regional banks and other firms that have excessive exposure to poor quality mortgages and now fall by the wayside. Bank of America's acquisition of Countrywide is the best example of this. In a few years, Countrywide's name may disappear to be replaced by new bank branches, with Bank of America now accounting for more than 25% of all residential mortgages in the U.S. Management clearly recognizes the strategic long-term implications of this deal, even if investors don't.
Investors should be buying now, as great values abound. Instead, they are fearful and sell, as is well documented by the behavioral finance literature. It isn't easy, particularly when prices are falling. But people do buy when products go on sale. Similarly, they should try to step back and recognize that Wall Street is now on sale. It is not possible to judge whether the recent rally indicates that stock prices have bottomed out. (In fact, I thought prices had established a bottom in March after Bear Stearns was sold off to JP Morgan for a song.) We'll know for sure, but only with the full benefit of hindsight. Still, current values are very attractive, even those names that are most in the news with some of the most flamboyant headlines. Download this article in PDF Format
About Advisors Capital Management, LLC
Advisors Capital Management, LLC (ACM) is a provider of managed portfolios and financial services for industry professionals and their clients. As investment strategist, Dr. Lieberman oversees the company's "Portfolio Partners" investment program. Additionally, he provides guidance to the ACM Wealth Coordinators who integrate the work of financial advisors, financial planning, tax, estate and portfolio management professionals to build, protect, and maintain clients' wealth. Although the information included in this report has been obtained from sources Advisors Capital Management, LLC believes to be reliable; we do not guarantee its accuracy. All opinions and estimates included in this report constitute the judgment as of the dates indicated and are subject to change without notice. This report is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.
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