“So wake up the members of my nation
It’s your time to be
There’s no chance unless you take one
And it’s time to see
The brighter side of every situation
Some things are meant to be
So give me your best and leave the rest to me”
With the utterly disheartening collapse of today’s “Gustav Relief Rally” I thought it would be a good time to write a post on some of the ideas going through my head around the time I started the 8 Stock Portfolio.
As described in my initial post “The Idea,” in early August there were virtually unlimited reasons to be pessimistic about the stock market, our financial institutions, and more broadly, the future as a whole. In the midst of this, my wife and I recently had our first child Jason and were considering our long term investment options.
Somewhat quickly, we came to the conclusion that the best place for our money was cash.
The consensus viewpoint held that the collapse in real estate was only beginning. Commodities were a bubble waiting to burst. And worse yet, the wealth building machine known as the stock market was broken. Credit contraction and risk aversion would make it impossible for businesses to conduct themselves and make profits as they had in the past. The excesses of a series of bubbles would take a generation to work themselves out. At best, the stock market would be “dead money” for a long time to come.
But by accepting the consensus viewpoint, I would also be accepting the corollary conclusion that my son’s future would very likely be worse than my present.
This was a conclusion that could not stand. I could accept the idea of a dreary future for me, but not for Jason. I decided to try my hand at optimism.
Optimism is not blind faith or irrational exuberance. It can simply be the idea that individuals and companies can leave the worst behind them and move on, that progress might take a detour but always finds its way back, or that it’s a better world for having gotten out of bed in the morning. Optimism is the belief that, in large part, the future will be an improvement upon the past.
With a measured dose of optimism in hand, I started to take a look around. Instead of seeing more looming disasters and blow ups, I started to see opportunities.
I went through old watch lists of stocks that I had always wanted to buy, but thought were too expensive. The prices had come down dramatically. I ran some screens and turned up dozens of well known brand names that were down 50%, 60%, 70% or more. I started to dig deeper. I found that some of these companies with broken stocks were still profitable and still generating cash. Even in the worst case scenarios that analysts had created for them, they would continue to be profitable, cash generating, viable businesses.
I had the opportunity to buy shares of world class companies at prices that hadn’t crossed a ticker tape in ten years or more. I wasn’t trying to find the exact bottom or time my purchases to some future catalyst. I was buying into profitable, cash generating businesses at heavily discounted prices. I started a fresh brokerage account and a new blog.
When disaster becomes easier to predict and even easier to accept, that’s when you should take a moment to think. Stop watching the headlines, stop listening to the news reports, and stop obsessing over the ebb and flow of every stock price. With your fears in check and measured optimism in hand, take a look around and start coming to your own conclusions. You might be surprised at what you find.