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The economy: why am I optimistic?

The global economy has collapsed, the stock market is decimated, we are all going to lose our jobs, and the sky is falling! Oddly, none of the recent economic turmoil has scared me. In fact, when stocks bottomed out (presumably) a couple of weeks ago, I started buying shares. I’m not Warren Buffett, but I now own a couple hundred shares of GM, and twenty-some shares each of Apple, Microsoft, and RIM.

Am I crazy? I’m hearing of people selling their houses and buying gold, stocking up on tinned goods and toilet paper, and most of all desperately trying to convert any equity investments they have into or some kind of guaranteed investment. There must be something wrong with me that I keep feeling this strange compulsion to go buy more stock…

I don’t know whether my condition is poorly placed optimism, or whether perhaps I’m just more adept at perceiving things beyond the immediate than most members of the news media. Don’t get me wrong: I’m quite clear on the fact that we are going through a major downturn, one of massive proportions that is still sending shockwaves through industry. I am deeply angered and disgusted at the amazing lack of restraint and sickening greed in the financial and banking sectors that led the U.S. economy to its current downfall. And it is obvious that many innocent bystanders will be hurt by the economic collapse as their jobs and personal wealth disappear.

But I also feel that this kind of collapse, with different causes but the same basic result, has happened before. And every time the economy loses 30-50% of its “paper” value, a few years later it has regained that and more. The cycle is fairly short: less than a decade- if you look beyond the next year or two, a well-balanced equity portfolio will easily recover. During the downturn, it is possible to seize opportunities if you have some “free” cash, and certainly it is a poor strategy to sell off your equities once the collapse is already well under way. As I believe Warren Buffett said, “Be fearful when others are greedy, and greedy when others are fearful.”

I don’t expect to get rich from my contrarian investments, and my “naive” understanding of the markets means I will likely lose as much as I gain via my little stock purchases. I mean, I’m buying GM for goodness sake, and their quarterly losses are outrageous. It is just so hard to resist buying stock at a 50 year low… one eighth what it was trading for a year ago. But my “big” investments, our equity-based RRSPs and our house, have lost massive amounts of value in the last few weeks: probably 20-30%. Shouldn’t I be dumping as much of those investments as I can, buying stuff like GICs and the like? Sell our house and buy gold, and live in an apartment?

Not now… not with another couple of decades until retirement. That’s my thinking, at least. In fact, I just used a bit of our line of credit room to put more money into my equity-based RRSPs. I expect that my RRSPs will recover all of their former value within two years. Within 10 years, my RRSPs will be ahead of a GIC based retirement fund by easily 20%, probably more like 30% based on compounded growth. At some point, as we get closer to retirement we’ll shift some of our pension funds into GICs, but only when the cycle is high. It is an approach that makes sense to me, at least.

I guess if this post has a message, it is one of optimism. If you have or are losing your job, nothing “optimistic” will really help you- you’ve been hammered by circumstances beyond your control, and what I say here won’t help. I don’t doubt for a moment that I’d be whistling a different tune if I was about to lose my main source of income. But if your job is secure, and you have some money in equity based RRSPs, I wouldn’t start panicking. The market will come back up, and unless you have all your eggs in one basket you should be fine.

That’s my theory, at least. And enough doom and gloom! Get out and enjoy life, it is more important than the stock market or the short-term outlook of your investments anyway.

4 comments to The economy: why am I optimistic?

  • You don’t sell your home.
    Real estate that you bought as an investment and have a big mortgage on? Well yeah, get out if you can, but chances are it’s too late for most “flippers.”

    But the place you live isn’t just and investment … it is also where you live. If you sell, you have to live somewhere else, and that costs.

    The only people who would be selling their *homes* are nuts or are going to loose them anyway because they can no longer make the payments.

    A home will always retain its primary value – a place to live – and generally will regain market value, though you might have to wait over 20 years.

    The thing that will kill people if it gets bad is that you may own your home, have it all paid for… but if you get behind on your taxes the government will could seize it as happened in the 30’s. Hopefully the government is smarter this time around, but I doubt it.

    I tend to share your, well if not optimism, a general lack of panic. From 1982 to 2000 the economy in Alberta sucked. A Bad economy is *normal* to my mind. And while the US is a basket case, the world economy overall is in better shape ( people take note, putting 80+% of our trade in the American basket is not smart – diversify! )

    I have work. I have a shelter. I’ll live. The economic downturn means that the potential of actually doing better has evaporated, but the loss of upward mobility is not the end of the world.

    Besides: With bird flu, 2012 asteroid strikes, global warming, ocean acidification etc etc it’s not like we live to retirement age anyway šŸ˜‰

  • I was amazed myself, Chris, when I read the article about the husband and wife that sold their house, moved into rented accommodations, and bought gold. The article positioned this as some sort of “smart” or advanced thinking move. Historically, owning your primary residence has always been a good idea- but people start doing stupid things out of panic and confusion.

    I suspect that, in the grand scheme of things, resource-rich areas will continue to do well. Oil prices have dropped, for example, but I would be surprised if they didn’t rebound above $100 a barrel within the next six months or so. Alberta should do well in that circumstance, so long as Ontario doesn’t rape Alberta’s profits to support its dwindling manufacturing sector.

    The biggest problem in the next little while will be businesses having difficulty getting development loans. The banks, having done stupid things like loaning money to people without completing credit checks, will now stop loaning money to going concerns in a sort of knee-jerk reaction. That will stifle growth.

    As for upward mobility- frankly, I’ve always thought upward mobility was more a state of mind than an economic condition. People who are desperate for the next promotion, the next raise, will make that their first priority and will generally figure out a way to get what they want just by sacrificing more of the rest of their lives and ethics. Folks who work to live, rather than live to work, will generally not “move up the corporate ladder” or whatever you want to call it, regardless of the economic circumstances.

    What will suffer is those annual raises “the rest of us” look forward to. But getting a 2.5% raise isn’t upward mobility, and I’ve grown used to not getting one anyway. Most corporations have been “clawing back” such increases for years. I could see some sectors even “rolling back” salaries: that would be bad news for a lot of folks. None of this, though, is new: even when the economy is doing great, most corporations still do their best to squeeze their staff as much as they can. Now the executives can hide behind the “economy” as an excuse.

    On a lighter note, we have your more pressing doomsday scenarios. The flu will probably kill a few million, but the asteroid strike could, with a bit of luck, wipe out a billion or two. The dust from the impact will cause a mini-ice age, halting global warming, and the decrease in pollution as billions permanently stop consuming should help stabilize the climate in the future. And once things sort of stabilize, there will be plenty of job opportunities for those of us who remain: see, it will all work out just fine! šŸ˜‰

  • Let me rephrase that then šŸ˜‰ … for me “upward mobility” would be a raise that actually matches inflation. Haven’t had one of those in 15 years, and 7 years of that have been “boom times.”

    Part(but only part)of that is a trade off for security, thus I am not looking at imminent unemployment as are some who took risk for a higher pay cheque.

    But I also guess that’s why I’m not all shook up about the economic downturn, I haven’t really felt much of the economic upturn. The boom didn’t make it down to my level yet, so unless we are looking at another great depression it’s all pretty much status quo.

    The big thing that strikes me is that this shows how worldwide, government ( for a number of reasons open to debate ) is not fulfilling it’s role. Capitalism is something of pulse rocket; a series of explosions punctuated by burnouts – your typical boom bust cycle ( or manic depressive!)

    The role of government in a “free” market economy is to act as a regulator, not in the legal sense but in the mechanical sense. It has to act to retard the highs and fill in the lows, to smooth out the economic engine so the passengers don’t die from all the shaking.

    Boom bust. feast famine, it’s just not a good way to do things.

    As to 2012 .. so you don’t think my doomsday scenario’s are that bad eh? Well how about this… If the economy tanks it will take down whoever is in charge in the states. Obama may very well be a one term president. And you know who has already talked about running in 2012? Yep. That’s right, Sarah Palin. “President Palin.” I mean is that isn’t a doomsday scenario I don’t know what is! :p

  • President Sarah Palin… Good lord.

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