Previous Columns
9:00 AM EST, Tuesday, September 16, 2008: What Wall Street needs is new capital. It was getting it from the Mid East and China. China has now officially outlawed sending money to save U.S. investment firms and U.S. banks. And the oil rich sheikdoms are running scared from plunging oil prices and having lost too much money already on their recent U.S. savior investments. Lack of new capital augurs badly for overleveraged companies like AIG, Morgan Stanley, Goldman Sachs, Bank of America, UBS and Citigroup. Pick a handful of them. Short them.

Think of this as a pebble thrown into a pond. First, the obvious hurt -- housing, then the financials that had financed the housing bubble. Then the home builders who built it -- some of which have inexplicably climbed recently -- Toll Brothers, Lennar and Pulte, for example. Now even New York real estate is starting to tumble, no longer overprised. Then, the ripples hit the car makers, the computer makers and even the law firms. Yes, you read right. The law firms are firing lawyers. No one is immune from this contagion.

In favor of pessimism: Most Lehman employees did not sell their stock, nor sell short, nor collar their options. As a result most lost their retirement nest eggs. The talk on Wall Street is that "I'll have to work several years longer." That is -- if they can find a job. Which many won't. Wall Street -- meaning the financial industry -- will be a much smaller place. The reasons:

1. Securitization is largely dead. You can no longer sell financial instruments no one understands.

2. Structured investments are largely dead. After Lehman, after auction rate securities, no one trusts Wall Street. The Washington Post actually published a recent piece called "A Con Game in Pinstripes." In it, it argued that "Wall Street has become fundamentally corrupt."

3. The brokerage business is dead. No one can become a broker today and seriously expect to make a living.

My best hedge fund is up to 50% cash. Like many professional investors he regards this market as "too hard."

My father used to argue, "Take some home." Make a little money with the business, take it home. Stick it in something ultra safe, like bonds. Earn yourself the ability to clip coupons when that rainy day comes" -- as it has now come.

Except not everywhere. True story: A year or two ago, a friend opened two high-end, ultra-expensive restaurants opposite the Manhattan headquarters of Lehman and Bear Stearns What better locations.

Today the restaurants are booming, with high booze and food sales. Eat and drink like there's no tomorrow.

State lotteries are experiencing record sales. People have cut their food budget, but increased their lottery budget -- keeping alive their dreams of hitting the jackpot and becoming rich.

In praise of mulling: Never agree to anything without mulling. A good night's sleep will always produce new arguments in your favor and convince you that you're asking too little. I have a folder on my laptop: "To Buy." I dump everything I want to buy into it. I revisit the folder a few days later. I don't need 50% of what's in there. The pleasure of "pretend" buying is often better than the pleasure of actually owning the thing.

In praise of thinking: After being up 30%+ earlier this year, my long-only commodities fund is now losing money -- 36 basis points to be exact. What's the argument to owning this thing? Allegedly it's the perfect diversification in one's portfolio. It performs well when the stockmarket doesn't. And vice versa. That's the theory. The reality is somewhat different, though the fund is up.

Commodity prices are allegedly tied to the growth in world economies. If they boom, they buy more commodities, like nickel, wheat and sugar. But if prices rise, people open more nickel mines, and grow more wheat and sugar. Then the price declines (down 50% or so in nickel and zinc in the past year). And we start all over again.

I asked my long-only commodities fund why they didn't also sell short, since they obviously knew commodities. They said it was "too hard." In the long run, as economies grew, commodities would improve in price, they argue. Hence, buy a basket of commodities as a hedge against the rest of your portfolio. But then I thought, "they do call them commodities for a reason." Anyone, in time, can mine nickel. I should think more.

In praise of being careful: From Australia:

Harry,
Today's column gives good advice about not leaving GPS units attached to the windscreen.
Further advice given by the Aussie police is that if you attach the GPS to your windscreen by suction cap, ensure that the suction cap mark is polished off before you lock up your car. Thieves will still target your car when they see this mark, because they know that the GPS unit is temporarily hidden inside your glove box.
Love your column. Keep up the good work.
Mick.

From Worcester, Mass comes this sorry picture:

And the explanation:

Absolutely real, and right behind the house. The thieves jacked it up sometime between midnight and 6 AM , in a "nice" neighborhood in Worcester MA. I think they used some of the stones from around the driveway to support it.

The house is for sale because my nephew and his wife work in Boston and want to move closer to work, and a prospective buyer was coming to see the house on the day the theft was discovered. Nephew didn't want to scare him off, so he put a tarp over the van. Later he got really nice wheels, presumably with locking lug nuts.

How to Handle a Market Gone Mad: That's the headline of a piece in today's Wall Street Journal by Jason Zweig:

The investing brain has a remarkable capacity for fooling itself. You can use that to your advantage.

If you learn nothing else from the last few harrowing days, you should learn the difference between what is obvious and what is inevitable.

In the heat of the moment, the two perceptions seem identical. It was obvious that investors would panic as they absorbed the news about Bloody Sunday on Wall Street, so it was inevitable that the market would take a slashing. It was obvious that Lehman Brothers had to go bust, so a bankruptcy filing was inevitable. It was obvious that Merrill Lynch could no longer make it on its own, so it was inevitable that a bigger institution like Bank of America would take it over.

But investors -- at least individual investors -- don't actually panic in times like these. Instead, they freeze. In July (the latest month for which final numbers are available), mutual-fund investors pulled out just $2.62 of every $100 they had invested in stock funds. That was less than they took out of bond funds, even though the stock market had just gone through a nauseating summer swoon.

According to researchers at Strategic Insight, who have studied decades' worth of data on how fund investors behave, this inertia is typical. Tim Buckley, who oversees retail investor operations at Vanguard Group, says the giant fund company had only 10% to 15% more phone calls and online inquiries yesterday than on a typical Monday in September. "However much panic there might have been on Wall Street," said Mr. Buckley, "there [was] no panic on Main Street."

Scott Jaffa, a 25-year-old systems administrator in Silver Spring, Md., called yesterday's plunge "as much a test of my psychology as anything else." Because he does not need the money "for another 30 to 40 years," he asked rhetorically, "why should I worry myself about its performance over a period of days or weeks or even months?"

Mr. Jaffa is already developing what the ancient Stoics and the great Danish philosopher Søren Kierkegaard called ataraxia, or imperturbability. But he knows that ataraxia does not come naturally; it takes work. A year and a half ago, Mr. Jaffa destroyed the online access code for his 401(k) so he could no longer have instant access to his retirement accounts. His goal was to make it "significantly harder" and to require "human interaction" before he could trade on his own emotions. That enabled him to watch Monday's decline without acting on it.

Here, then, is one way the obvious is not inevitable. It may be "obvious" to professional money managers that small investors are the problem in turbulent markets. But it's not individual investors who cause (or even widely participate in) a selling frenzy. It is, instead, the "smart money" that tends to panic.

But the differences between obvious and inevitable run much deeper than this, all the way down into the biological bedrock of our minds. The investing brain is bad at some things and good at many others, but above all else, it has a remarkable capacity for fooling itself. What seemed so obvious and inevitable Monday had, less than 24 hours earlier, struck nearly all of us as impossible.

Before Sunday, not even most people on Wall Street really believed that Lehman would go bust. The stock finished last week with a market value of $2.5 billion, showing that investors as a group simply did not believe that Lehman would go under.

But by Monday morning, everyone's beliefs had already been retroactively revised; suddenly, Lehman's bankruptcy had been "inevitable." Psychologists call this hindsight bias -- the uncanny feeling that "I knew it all along."

History is full of such instances. The O.J. Simpson verdict, for example, convinced people that they had predicted he would be found innocent (regardless of what they actually said before the jury made its decision).

Once Lehman went bust, none of us could remember how surprised we were when we first heard that it might. As Princeton University psychologist Daniel Kahneman says, "Hindsight bias makes surprises vanish." And therein lies its extreme danger for investors. By retroactively fooling us into thinking that we knew how the past would unfold, hindsight bias tricks us into thinking we know how the future will unfold. But if the past took you by surprise, why should you believe you can decipher the future?

The question answers itself. It also points the way toward a sane course of action even as the markets seem to have gone mad.

Be a contrarian. The late Sir John Templeton preached that investors should buy at the "point of maximum pessimism," when market sentiment stinks and no one wants to hold anything but cash. Adds Daniel Fuss, vice chairman at money manager Loomis Sayles & Co. in Boston: "It's not a point, it's a period." No one can find the point or moment at which pessimism hits its exact zenith. But it's not hard to identify a period in which pessimism is extreme -- like right now. When I spoke to him yesterday, Mr. Fuss called this market "the best opportunity to buy corporate bonds at phenomenal prices since September 1974." Risk takers might take a look at real-estate-related stocks; extreme risk takers might even consider a small allocation to financial stocks.

Take an inventory. "Instead of just saying, 'Everything's going down, everything's going down'," says Gary Schatsky, a financial planner in New York City, "write down on a piece of paper everything you own and everything you owe." Then go through each of your assets and liabilities to see how you might improve your position. In a period when stocks and bonds and mutual funds are not delivering positive short-term returns, you can probably add the most to your net worth by turning your attention to paying down or consolidating your high-cost debt.

Take baby steps. If you truly cannot sleep at night, sell off some stocks, or move some of your money to bonds or cash. But do so a little bit at a time, and talk to your tax adviser first in order to maximize the considerable tax benefits you may be able to get out these incremental moves. By the time you get any money moving, the panic may already have passed.

Question authority. If the financial world really were coming to an end, nobody would know it -- least of all the pundits who are currently crying doom. In 1929, experts ranging from the legendary trader Jesse Livermore to John D. Rockefeller and Treasury Secretary Andrew Mellon all declared that falling stock prices were nothing to worry about. They were wrong. The lesson is not that it's a mistake to be an optimist in falling markets, but rather that it's a mistake to trust the consensus view of the experts. With the mood on Wall Street now as dark as a mushroom farm, optimists are much more likely than pessimists to be proven right in the end.

In favor of optimism: Yesterday, this bank stock reached its all-time high, before easing back a few pennies late in the day.

The many dangers of a tight skirt:
In a busy city at a crowded bus stop, a beautiful young woman was waiting for the bus. She was decked out in a tight leather miniskirt with matching tight leather boots and jacket. As the bus rolled up and it was her turn to get on the bus, she became aware that her skirt was too tight to allow her leg to come up to the height of the bus' first step. So, slightly embarrassed and with a quick smile to the bus driver, she reached behind her and unzipped her skirt a little thinking that this would give her enough slack to raise her leg.

Again, she tried to make the step onto the bus, only to discover she still could not make the step. A little more embarrassed, she once again reached behind her and unzipped her skirt a little more. And for a second time she attempted the step, and once again, much to her surprise, she could not raise her leg because the skirt was too tight.

With a coy little smile to the bus driver, she again unzipped the offending skirt to give a little more slack and again was unable to make the step.

About this time the big Texan who was behind her in line, picked her up easily from the waist and placed her lightly on the step of the bus. Well, she went ballistic and turned on the would-be hero, screeching at him, "How dare you touch my body! I don't even know who you are!"

At this the Texan drawled, "Well ma'am, normally I would agree with you, but after you unzipped my fly three times, I kinda figured that we was friends."

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 on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.