If the year were to end today, the S&P 500 would be down a record amount for a one year period.

Joy.

But thankfully, we still have 5 more weeks left to go before we try and set that record.

Either way, the year will likely go down in the record books as a dismal one for stock investors.

According to Barron’s:

1. Only 10 stocks out of the S&P 500 are in the green for the year.

2. After the S&P 500 hit an 11-year low on Thursday, it was the furthest below its all-time high than at any time since 1949.

3. The S&P hasn’t been this far below its 200-day moving average since 1932.

4. More than 40% of the Russell 3000 are trading below $10.

5. Last week, the Russell 2000 (small caps) dropped 14% in two sessions, its worse 2-day loss in its history.

6. Goldman Sachs recently told clients that the S&P 500 3-month realized volatility is now 66%, surpassing all other volatility levels except that during 1929 when it was 68%. Goldman expects the index to surpass that dreadful year shortly.

With news that gloomy, why should you even be invested in the stock market?
Because there is no way to time when it will bounce back. And if you try to time it, you’ll miss it.

Most investors think they’re geniuses in market timing when, in fact, most equity gains are historically made during very few trading sessions.

In a market sell-off like this one, investors are more fearful than normal. They retreat to the sidelines but have no real idea when to get back in. So they don’t- and they miss the rally.

Instead, dollar cost averaging can be an investor’s friend. Buy more shares when the markets are down and companies making money are on sale.

And there WILL be a turnaround. There always is.

Contrarian Indicators Abound

This weekend’s Chicago Tribune had an article in the Business Section about investors buying mutual funds that short stocks.

Pardon me for asking, but isn’t it a little late to be jumping into those now? (with the S&P down over 40%?) Sure- it’s possible we will have a further decline but most of that bet has already passed.

And the thing about the Bearish mutual funds, is that they make oversized returns in years like this- but it is simply for one year or two. And then they underperform.

Because there are many more years of “up” markets, then down.

The damage has already been done to the markets. Investors need to look at buying- not selling.

This is a once-in-a-lifetime opportunity. Are you going to be invested in the markets to take advantage of it?

Fortunes will be made. Have the guts to seize yours.

The Wall Street Journal has an article today called, “Small Fannie, Freddie Holders Take Issue with Washington” about how the government bailout of those entities screwed over the little guy who owned the stock (and who now stands to get nothing.)

Yet, the “little guy” they highlight in the article, Adam Freid, a general contractor in Thousand Oaks, California, who says he’s thinking about bringing a class action lawsuit against the companies because of the injustice, bought 25,000 shares of Freddie Mac just last week at $5.

He hasn’t owned them for months, years or decades- as other little guy investors have.

No- he bought them last week because he said Treasury Secretary Paulson gave the impression in congressional testimony and interviews that a government bailout of the companies wouldn’t be necessary.

“After reading that, I said, ‘I’m going to buy this stock. It’s been beaten up, but it will go up over time,” he said.

25,000 shares at $5 per share = $100,000

Not a small investment, by any means.

Maybe he has plenty of money so he was willing to take the gamble on a company with absolutely no earnings and in financial distress.

But that’s apparently not the case.

The article goes on to say that the $100,000 was money he was saving for his young sons’ college education. (And the article has a cute picture of him with his sons, who look like they’re under 10 years of age.)

Many Troubling Questions

1. Why not just buy some stable large cap stocks, say, a GE, or ExxonMobil, or Johnson & Johnson, that pay a dividend and wait 10 years until the kids are ready for school? It’s not going to go to the moon, but you’re not going to lose it all either.

2. Why invest it ALL in one stock?

3. Why did he think it was a stock that would “go up over time” when its financial situation is so unstable?

I could go on and on.

Buying Financial Stocks Is NOT “Investing”

Right now, the beaten down financials such as Lehman Brothers (LEH), Washington Mutual (WM), and others are NOT “investing.” None of them are making profits and it’s unclear when they will begin to do so.

If you buy LEH at $2 a share, you are gambling. Pure and simple.

You guy Google (GOOG) because it has $12 billion in cash (and is making billions more this quarter) or Microsoft (MSFT) because it pays a dividend AND it too has billions in cash. Both of these companies have a business model that is succeeding.

None of the financials do. I haven’t heard anyone talk about what the plan is to actually create some earnings- let alone grow those over time. (And the current crisis is so severe, these companies are just trying to live to fight another day.)

Is that what you want to own? Is that the company to invest in “for the long haul”?

Let’s Call it What It Is: Gambling

Would people be as sympathetic to Mr. Freid’s loss if he had gone to Las Vegas and lost it all at the crap table?

Of course not (as that happens probably every day in Sin City.)

But that is what Mr. Freid just did with his sons’ college fund. He gambled it and lost. As he said:

Mr. Freid says he was listening to television commentary on Friday night and heard only bad news for shareholders. “I realized I was toast,” he says. On Monday he sold his position.

For the rest of us- learn the lesson: buying the financial stocks isn’t “investing”- it is gambling.

And the House always wins.

Small Fannie, Freddie Holders Take Issue With Washington [Wall Street Journal, Sep 12, 2008]

Bill Miller has fallen…and he can’t get up.

Not yet anyway.

Bill Miller is the famed value mutual fund investor at Legg Mason Value Trust. He is the only portfolio manager who beat the S&P 500 for over a decade. His “streak” lasted 15 years- ending in 2005.

Since the end of that amazing run, he has struggled. In fact, this year, his fund is getting hammered and investors are fleeing.

But in his letter to investors at the end of the second quarter (end of July), he said the best time to invest in Legg Mason was after they had horrible performance (the storm before the calm, so to speak.) Yet- investors usually chase returns and therefore continue to flee.

In that same letter, he talks about recently talking to Warren Buffett about how difficult it has been to be a value investor.

“Mason Hawkins said, “Warren, I’m an optimist. I think this whole thing can turn quickly and surprise people. Are you an optimist?”

“I’m a realist, Mason,” the sage replied. Warren went on to say he was optimistic long term but said it would take some time to work through the current challenges.

Bill Miller didn’t accomplish his incredible 15-year run by a fluke. That took hard work, investing skill and good instincts.

He seems a bit lost right now about the direction for himself, and value investors in general. From the letter:

“As a matter of psychology, I think most of us value investors think we have plenty enough bargains already, and may not be able to handle that many more. Or more accurately, our clients may not be able to.”

It’s a tricky market. Sectors that seem like a “value” such as the financials- may not turn out to be (or it may be too early.)

Learn Lessons from Bill Miller

Bill Miller’s portfolio got hammered recently because he bet on housing and financials and didn’t bet on energy or the metals. Did he just miss the boat or will he be proved right eventually?

Fundamentally, many of the financials and homebuilders ARE value plays. But so were the energy stocks and the metals.

Many articles in the mainstream press are piling on about how “awful” Bill Miller’s more recent track record is. But why focus on the negative? He has an amazing record and I have no doubt he’ll turn it around.

It’s what the best investors do.

Some lessons:

1. Remember to follow value fundamentals even if the herd is going another way.

2. Not all value plays are true “values”- be prepared to re-deploy your money.

3. When people are buying, maybe you shouldn’t be.

Let’s just say, we should all be as “awful” as Mr. Miller.

Investing giant John Templeton died yesterday at the age of 95. I’ve talked about him several times on this blog because his investing advice is so simple.

Basically: don’t follow the crowds. When there is increasing pessimism, then that is the time to invest.

A few years ago, in one of his last interviews, he talked about the housing market and made a prediction. I wrote about this last January but I’ll repost it here again.

Moving on to housing prices, Sir John comments: “Every previous major bear market has been accompanied by a bear market in home prices. . . . This time, home prices have gone up 20%, and this represents a very dangerous situation. When home prices do start down, they will fall remarkably far. In Japan, home prices are down to less than half what they were at the stock market peak.” Sir John adds, “A home price decline of as little as 20% would put a lot of people in bankruptcy.”

Sir John also had a few words about debt — a four-letter word that folks seem not to care about: “Emphasize in your magazine how big the debt is. . . . The total debt of America is now $31 trillion. That is three times the GNP of the U.S. That is unprecedented in a major nation. No nation has ever had such a big debt as America has, and it’s bigger than it was at the peak of the stock market boom. Think of the dangers involved. Almost everyone has a home mortgage, and some are 89% of the value of the home (and yes, some are more). If home prices start down, there will be bankruptcies, and in bankruptcy, houses are sold at lower prices, pushing home prices down further.”

On that note, he has a word of advice: “After home prices go down to one-tenth of the highest price homeowners paid, then buy.”

In some places we’ve already fallen 20% to 30%. Will his prediction ultimately come true?

John Templeton bought stocks, against all odds, in the heart of the Great Depression. He bought Japan in the 1950s and 1960s when people laughed. He shorted tech stocks in the late 1990s and pocketed $86 million while doing so.

I’ve already posted his investing “lessons” once before but these too are worth repeating:

From the Motley Fool UK:

Templeton boiled down his philosophy into ten maxims, which are still followed today by the fund managers at Franklin Templeton:

1. Invest for real returns.
The true objective for any long-term investor is maximum total real return after taxes.

2. Keep an open mind.
Never adopt permanently any type of asset or any selection method. Try to stay flexible, open minded and skeptical. Long-term top results are achieved only by changing from popular to unpopular the types of securities you favour and your methods of selection.

3. Never follow the crowd.
If you buy the same securities as other people, you will have the same results as other people. It is impossible to produce a superior performance unless you do something different from the majority. To buy when others are despondently selling and to sell when others are greedily buying requires the greatest fortitude and pays the greatest reward.

4. Everything changes.
Bear markets have always been temporary. And so have bull markets. Share prices usually turn upward from one to twelve months before the bottom of the business cycle and vice versa. If a particular industry or type of security becomes popular with investors, that popularity will always prove temporary and, when lost, may not return for many years.

5. Avoid the popular.
When any method for selecting stocks becomes popular, then switch to unpopular methods. Too many investors can spoil any share selection method or any market timing formula.

6. Learn from your mistakes.
“This time is different” are among the most costly four words in market history.

7. Buy during times of pessimism.
Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy, and the time of maximum optimism is the best time to sell.

8. Hunt for value and bargains.
Too many investors focus on outlook and trend. Therefore, more profit is made by focusing on value. In the stock market the only way to get a bargain is to buy what most investors are selling.

9. Search worldwide.
To avoid having all your eggs in the wrong basket at the wrong time, every investor should diversify. If you search worldwide, you will find more bargains and better bargains than by studying only one nation. You also gain the safety of diversification.

10. No-one knows everything.
An investor who has all the answers doesn’t even understand the questions.

John Templeton lived the American Dream. He became rich by using only his mind and mastering a subject, investing, that few others can master. That is the American way.

Rest In Peace, John Templeton.