Why are people afraid of the dark?

Quite simply, because they no longer have a grasp of their surroundings and hence no way to determine if they are in danger.

To a great extent, the phrase “fear of the unknown” is redundant; in many cases, the unknown itself causes fear.

It is this idea that is currently pervading our society and our capital markets. Although short-term traders are known to have extremes of emotion and all too often need both hands to count their heart attacks, if one were to analyze the emotional characteristics of a successful long-term investor, he or she would find that there is little fear – only discipline and contingency plans.

However, being that there is no qualification exam or screening process to decide who invests what in the markets, a great deal of wealth is comprised of capital from ordinary investors. Moreover, not everyone who is disciplined has money; not everyone who has money is disciplined.

Times like this manifest the true nature of each investor, separating those who will react and adjust from those who will react and panic.

Not many people are adjusting.

The reality of what “investment” means… and what we actually own

Here’s something you may already know, but are afraid to think about: Your stock, in and of itself, is worth nothing. Not a damn thing.

Stock is not tangible. This gravity of this concept is creating a reality check for equity owners. As their accounts decline further, they come to the realization that what they own is an idea, a speculative share in a company that is slowly becoming blurred into financial ambiguity among a mass of corporations that have collectively shredded market confidence with their dishonesty and inability to adapt.

Those of us who remember the technology bubble – though it seems like a dream at this point – know that companies can be successful without ever turning a profit. Innumerable companies got rich purely on the prospect – rather, the speculation that their company would somehow, some way use some innovative idea to earn some money.

On the other, more grounded hand, think of the grandparents who have passed to their children and grandchildren shares of stock in companies that have withstood the test of time, that one would have thought to retain value forever, such as Ford or General Motors.

(Moment of silence)

When it becomes apparent that we cannot trust our investment dollars to companies such as these, our fear is free to run wild. It is this cold dose of reality that is causing what’s left of the long positions to be frightened, and create doubt in the minds of investors who have recently gone bottom-shopping.

Motley Fool and other media entities need you to remain scared

CNBC needs fear like you and I need water. Sure, they can broadcast when things are boring, but those ratings don’t compare. You know that, so I won’t elaborate.

However, I cannot be the only one who noticed that for a few weeks following the bulk of the recent decline, Motley Fool’s site was characterized by the title, “Panic 2008” plastered across its homepage in bright red letters. The web site then proceeded to publish article after article telling people “not to panic.” In fact, the line directly succeeding this fear-mongering headline urged the readers to “stay calm.”

After enough talk had come about the idea of bargain purchases being available to make it a reasonably viable idea (and hence a safe proclamation by their riskless web site), they switched their banner title to “Opportunity 2008.”

The day after the market falls, they explain that it fell. That’s news, not investment perspective. No one has balls like Motley Fool, giving us investment “advice” on events that have already taken place. I am going to write a letter to the brilliant minds at fool.com and ask them if they could tell me the weather last week.

Most recently, however, something interesting has happened. Their site no longer bears the “panic” statement, and there is no trace of an “opportunity” declaration. There remains only the usual index data and headlines. This is undoubtedly a result of uncertainty and widespread fear; the uncertainty of what is to come and the fear of being incorrect. Subsequently, the hands of their editor are tied to the point where they must now wait to see what happens to tell you… that it happened.

Even the people who use fear to run their business are scared.

Bottom? Yet? Please?

As I type this, I’m watching the Dow and the S&P party like it’s 1997. 

A couple of weeks ago, I stated that I saw a “near-term bottom” in the markets with the lows in the 800-900 area that we recently experienced. I realize the phrase “near-term” could be construed as anything from a week to a year. I should have elaborated.

I would love to give myself and others the security blanket of saying that we’ve hit the absolute bottom and that our market will never ever go below that point again. I cannot do this. However, I do believe that breaking below 800, as we are now, would have more significance if the market had not been down almost 50% year-over-year already. There is such a great deal of support in and around this area, that I do not believe it will tear through it the way we tore through the 1000 mark (as if it weren’t even there).

The reality that I am staking my entire reputation on this sentence has hit me, but nevertheless I must express to you that I fully believe that we will not see the “Dow 5,000” that some analysts are hinting at for shock value. Unless things get unexpectedly nasty in the next six months – when I say “unexpectedly” nasty, I don’t mean more layoffs nasty, I mean losing Bank of America and Citigroup and two dollars-to-the-euro nasty – I just don’t believe it will happen.

Fear be damned, I’m still buying. So what if I’m still holding it in February. Find me a crystal ball and I’ll do something different.

John K. Whitehall
Analyst, Oxbury Research