Close your eyes and cover your ears…
An editorial by Chuck Young,
I am writing today about a letter that an investment bank sent to all of their customers (see below for a copy of the letter). This letter was sent to a relative of mine, who upon receiving it asked me to review it for her. After I read this letter I was shocked at the inferred meaning that seems to be in this letter. Which is: don’t confuse yourself with the facts, leave everything to us. In other words, don’t get educated on what is happening in the world.
The title of the letter is "Weathering The Storm" and was received by my relative just a few weeks ago. The very first paragraph of the letter states that "in difficult financial times like this the best thing you can do is to remember your financial goals, turn off the financial news channels and be patient". The letter goes on to say "I don’t want you to get confused by all the frantic news you are hearing in the media so let’s discuss the ‘Credit Crunch’". The author goes into a very short description of what CMO’s and CDO’s are. But the author fails to discuss the impact that the ‘credit crunch’ may have on the economy, or the extent of the losses that banks and mortgage companies have already reported, and the possibility that the losses could extend much further.
The author describes that the stock market action is "… a correction", and that they are a normal occurrence in the markets. The author is correct in that corrections are a "natural part of the markets". But he or she fails to mention in the letter why the market for the CMO’s and CDO’s has collapsed, no mention of the declining housing market which the Chief Financial Officer (John Stumpf) of Wells Fargo Bank said on November 14th 2007 that the housing slump was far from over and was the worst since the 1930’s Great Depression. No mention that mortgage lender CountryWide Financial said on July 24th 2007 that prime mortgages are now suffering losses and that it is seeing housing price declines at a level not witnessed since the Great Depression. And what about the potential that the United States could be heading into a recession? Nope, no mention of that either.
It is my opinion, that the author of this letter wishes for their clients to remain in the dark, keep the TV off so that you don’t learn the additional facts of what is going on. For if they learn the facts about how bad the financial markets are in this country they may want to withdraw their money from the bank. What if an investor at this bank decided that upon reading the Wall Street Journal, or watching the financial news channels for the monthly Government data on the housing market conditions decides that they wish to put their money somewhere they feel it will be safer? That is their right to do, but for a bank to tell their clients to "turn off the TV" and "read a good book" is an insult on the intelligence of their clients.
The writer says that the global economic growth is good and states that 120 countries have growth at a rate of 3.5% annually. But what about the economic growth of the United States? Even Ben Bernanke, Chairman of the Federal Reserve, said in testimony to Congress last month that the United States economy was slowing. The author fails to mention that as well. And because we are in a ‘global economy’ now, when the United States’s economy goes down, there is the potential for the growth rates of other countries to also be impacted. But the author does not mention that either.
If I had money being managed by this bank, and I got this letter, my personal response would have been to close my account immediately. For I am an intelligent person, and to tell me to "read a good book" or "go for a walk" is an insult. The author says "Of course there are no guarantees and past performance is not an indication of future performance", but why tell your clients to turn off the TV and go read a book? Are you afraid that if they learn the facts that they may wish to withdraw their funds and invest them in safer money market accounts or perhaps Certificate’s of Deposit (CD’s)? Be fair to your clients, don’t tell them to close their eyes and ears. It is interesting that the company did not even date or sign their letter.
NOTE: I will send this editorial to ‘First Citizens Investor Services’ for their comment. Any response to my editorial they wish to provide I will publish here in verbatim in fairness to them.
I think the letter may be either right or wrong depending on his audience.
In the long wrong, most investors are better off not trying to “time” the market. Too many small investors sell at the bottom and buy at the top. Unless you are an informed investor with a lot of time to follow the news and move quickly, it is probably prudent to get your money into the U.S. stock market (say the S&P) and just let it go until retirement. The U.S. has been through World Wars, missile crisis’, Vietnam, impeachments, housing booms and busts, recessions, inflation, stagflation, 9/11, etc., and have always found a way to bounce back. Just look at the return of the stock market over the long run. Quite impressive. Yes….the current liquidity issues are causing pain to some, but they will be worked through. I don’t know if it will take 2 months, or 2 years, but it will be resolved. For many (not all) the best advice would be to just step aside and let their money ride in great US companies.
Dave,
You may have lost the point of the editorial. The credit crisis and mortgage problems can NOT be explained in less than 100 words as that company did. Secondly, that company failed to mention the root cause of why the market had collapsed for the CMO’s and CDO’s. Simply stating that this has happened does not address the cause.
To tell ones clients to turn off the tv and go take a walk means in my view ‘ don’t educate yourself on what is happening’. Some people Dave don’t want to wait years for their investments to be profitable, or even more importantly they may want to safe guard their funds by investing in something more secure and has FDIC backing, stocks don’t. When the employees of Enron were being told that everything was OK as the company was falling into a black hole do you think those employees who lost their entire retirement savings wish that they had opeden their eyes and ears and did their own research? Turnig off the TV is no way to go through life. If I had written that letter I would have recommended articles to read to better educate the reader on the situation, I would have addressed the root cause, and I would never tell my clients to just “go for a walk” for the best investor is an educated investor.
It almost sounds like we are saying similar things. It depends on the writers audience. My dad is 70 and he has his money in all types of investments. He is not an astute investor and tends to want to jump and react to every headline. Heck, he wanted to buy Lennar at 70 because he had finally gotten wind of the fact that the homebuilders were hot!!! I begged him not to chase the stock (he didn’t) and now he is happy that he waited. He literally spends less than one hour per month with financial matters and clearly does not have the business acumen to make the smartest financial decisions. He will never have the time, energy or background to do so. I suspect there are many passive investors out there like my dad. To the “uninformed” I believe that a little knowledge can be a dangerous thing. I didn’t want my dad to hear that the homebuilders were hot. I don’t care if my dad knows the reasons behind the credit problems. He doesn’t have the background to dessiminate the information and make above market choices based on that information. I don’t care if there “might” be a recession. For every guy that says there may be a recession, there is another economist that says there will not. Who do you believe? Do you analyze the background and track record of each and every guy that makes a prediction? I just want him to leave his money in high quality companies, bonds, money market, etc. He has done great by simply “buying great mutual funds” with a buy and hold strategy. He would never have done better than market average by reacting to headlines. For my dad (and I suspect many other investors with his profile) I suspect this newsletter would have been fine.
Now if you are a more astute investor (such as yourself and other readers of this site) and want to potentially outperform the market, I can see how over-simplification could be offensive to some. I read and watch every headline and want to know all of the details.