Is the Credit Crisis Over? There Seems to Be a Light on the Horizon ...

It’s now eight or nine months into the credit crisis and many of the stocks that we picked up during the panic on Wall Street are up 25, 30, 35% or more. These aren’t just cheap, undervalued companies, but rather long-term businesses in which we want to remain owners for at least the next five or ten years. I’m hoping that many of you didn’t make the mistake of stopping your 401k or IRA contributions, or even worse yet, selling out of your low-cost equity index funds when things dropped. If you did, the odds are pretty darn good you just cost yourself tens, or even hundreds, of thousands of dollars by the time you reach retirement. You refuse to sell a house during a down market but you’ll part with your stakes in great companies? It makes no sense. It’s important to begin thinking from that mindset, but to do it with good risk management, you need to truly understand the companies you own – how they make money, where the sales are generated, what the cost inputs are, the potential landmines on the balance sheet, etc.

For many investors, I’ve long thought the best course of action might very well be to own stocks in certificate form, have them parked in a bank vault, and collect dividends in check form through the mail. For some reason, this seems to make people really get that their stocks are not just electronic blips on a screen but literally a pro-rata ownership stake in a real-life firm that has honest-to-goodness employees, customers, vendors … you get the point. Perhaps it’s the cash showing up in the mail, the process of opening the envelopes, going down to the bank and depositing the funds into an account, and then being able to spend (or reinvest) it. Although the reported earnings per share are just as real, assuming the underlying accounting is good and conservative, many people just seem to be unable to make the psychological association that it’s the same thing when those profits are retained and as long as you don’t intend on selling your shares in the short-run, the price doesn’t matter to you except to the extent that it allows you to purchase more ownership, as Ben Graham taught us.