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8:30 AM Friday, October 14, 2005: The lesson of what you're about to read is fourfold:

1. When in doubt stay out.
2. Sell some investments. Get more cash.
3. Get stronger investments.
4. Don't panic. All this is pure fantasy.

People are playing around with all sorts of gruesome charts to forecast a major stockmarket plunge. The plunge is scheduled for next week. The "logic" is the bursting of the housing bubble. As an analogy, after The Tech Wreck of 2000-2002, NASDAQ was down 78%, the S&P had lost 50%, and the Dow had fallen 38%.

On October 19, 1987 -- Black Monday -- the Dow dropped 22.6% -- the largest one-day percentage drop in history.

Lots of people had lots of theories for the 1987 crash -- from the weakening US dollar, high P/Es (they were around 20), SEC insider trading probes, the deteriorating US trading deficit, the explosion of derivatives and computer or program trading (in which the computer automatically pulls the plug and sells mindlessly). But there were no important events or major news prior to Black Monday which precipitated the crash.

The crash basically just happened.

The 1987 crash marked the end of a five-year bull market that had seen the Dow rise from 776 points in August 1982 to a high of 2,722.42 points in August 1987. Unlike what happened in 1929, the market rallied immediately after the crash, posting a record one-day gain of 102.27 the very next day and 186.64 points on Thursday October 22.

However, it took two years for the Dow to recover completely; by September of 1989, the market had regained all of the value it had lost in the 1987 crash.

Here are a couple of charts. Basically you can prove anything with charts:

What to do? In the last few days I've made some recommendations. A very smart and very successful ex-hedge fund manager, now living in Japan writes:

Could things get as bad as I think they could? Yes. Will they? I don't know. No one does. What am I talking about? The explosion of debt and credit in the US, the housing bubble (There are 450,000 licensed realtors in California; this year there will be 650,000 home sales.), overpriced stocks, the coming collapse in stock prices, recession (depression?), a dramatic fall in the US dollar. The evidence is everywhere, for example as of yesterday the major stock indices are now all down for the year. Take a look at a chart of Walmart's (the biggest retailer) or Fannie Mae's (the engine of the mortgage market) stock price.



In the spirit of better safe than sorry, I recommend the following courses of action.

1) Open a Treasury Direct account. Requires no money up front. This is an account with the US Treasury that enables you to buy Treasury bills and notes directly and electronically. You can use this form www.publicdebt.treas.gov/forms/sec5182.pdf to open an account, or another one on their website if you want to buy securities at the same time. Why is this better than going through a broker? Because a broker or bank may fail, making it difficult for you to get at your holdings. It is much less likely that the US Treasury fails. By the way, if you think that your money market account is the same, think again. Almost all money market accounts invest in commercial paper. If companies fail, they don't pay off their debt. (There are a few that invest only in Treasury paper, and so if you want the flexibility of such an account, that's fine. dreyfus.com Dreyfus 100% U.S. Treasury Money Market Fund)

2) Find a place where you can buy physical gold and silver. I think it's too early to do so now. The market is too bullish and so I think prices are in for a sharp fall before bottoming. Also, it will be a while before the currencies fail, so there's no need to rush into metals now. If and when currencies do fail – i.e. people lose all confidence in paper money – then it will be time to own precious metals. Here's one: milesfranklin.com

3) Set up a way to buy Rydex Funds. They offer several inverse funds, i.e. as the market goes down, the value of these funds goes up. You can purchase directly from them rydexfunds.com or go through a broker. A broker is easier because they have a lower minimum.

4) Set up an account with Everbank.com. everbank.com They let you convert funds into foreign currency deposits. Again, when the dollar starts to collapse, this will be a good idea for cash.

5) Sell all REITs. When the property market collapses, these will lose all their value very quickly.

6) Rethink your stock holdings.

7) Rethink your fixed income holdings. All but the strongest are vulnerable in such a downturn. (Look at what happened to GM's debt this past May.)

Accounting irregularities...get the hell out. And get the hell out FAST. Item: Refco shut down one of its key units and the New York Stock Exchange halted trading of its shares indefinitely. The government charged the departing CEO with fraud. Five days ago, Refco had a market cap of $3.8 billion. Now it has effectively a market cap of zero! And you can't sell the shares if you're stupid enough to still own some.

The virtue of Social Security
Having reached the age of 65, a friend went to apply for Social Security last week. After waiting in line for a very long time, he finally got to the counter. The woman there asked me for his driver's license to verify his age. He had left his wallet at home. "I have left my wallet on the nightstand in my bedroom. I'll go get it and come back later."

She replied, "Unbutton your shirt."

My friend was confused, but he opened his shirt, revealing lots of curly silver hair.

She said, "That silver hair on your chest is proof enough for me," and with that, she promptly processed the application.

When my friend got home, he couldn't wait to tell his wife about his experience at the Social Security Office.

She listened to the whole story and then said, "You should have dropped your pants. We might have gotten disability, too."

Yet another dumb blonde joke
A young ventriloquist is touring the clubs and one night he's doing a show in a small town in Arkansas.

With his dummy on his knee, he starts going through his usual dumb blonde jokes when a blonde woman in the 4th row stands on her chair and starts shouting: "I've heard enough of your stupid blonde jokes. What makes you think you can stereotype women that way? What does the color of a person's hair have to do with her worth as a human being? It's guys like you who keep women like me from being respected at work and in the community and from reaching our full potential as a person. Because you and your kind continue to perpetuate discrimination against not only blondes, but women in general..and all in the name of humor!

The embarrassed ventriloquist begins to apologize.

The blonde yelled back, "You stay out of this mister! I'm talking to that little shit on your knee."

Recent column highlights:
+ How my private equity fund is doing. Click here.
+ Blackstone private equity funds. Click here.
+ Manhattan Pharmaceuticals: Click here.
+ NovaDel Biosciences appeals. Click here.
+ Hana Biosciences appeals. Click here.
+ All turned on by biotech. Click here.
+ Steve Jobs Commencement Address. The text is available: Click here. The full audio is available. Click here.
+ The March of the Penguins, an exquisite movie. Click here.
+ When to sell stocks. Click here.

Harry Newton

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. That money will help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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