Earning money is nice; making it grow is even nicer. What should individuals who want their money to make money do? Put it in a bank? Interest rates are negligible. Buy stocks? The memory of Enron and other scandals is still fresh. Recently this writer sat down with Michael Woolfolk, senior currency strategist at the Bank of New York, and Michael Benjamin, a Wall Street trader who hopes to challenge Senator Charles Schumer on the Republican ticket. This is the advice they offered over smoked salmon and Chardonnay at Harry’s in Manhattan’s Financial District.
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Forward: Is it time to return to the stock market?
Benjamin: Corporate scandals deterred a lot of people who would otherwise return to the stock market. This is why I think that investors’ confidence is so important. I was in the market. I was trading stocks. I would see a Morgan Stanley analyst come on television and say: “We recommend a strong buy on Cisco,” and I would look at my computer screen and see that Morgan Stanley is selling the buy. I thought: How can that be? They recommended the stock, and they are the biggest sellers. Why did they do it? That’s the way they made money. A lot of market analysts are not impartial; they are salespeople. The bottom line: Return to the market — carefully.
Take a stock like Look Smart (Look). The analysts say that it is grossly undervalued, and nobody buys it. Take another stock like Sina. The analysts say that it is grossly overvalued, and everybody buys it. Why?
Benjamin: My experience in the stock market taught me one major thing: No matter what the stock is, 75% of its up or down movement is market-related. When the market was up, all the good companies went up and took the bad companies with them. When the market deflated, it took down a lot of the good companies with it. The economic environment is crucial for your investment. If the market is up, chances are your stock is going to go up. When Cisco and eBay and Microsoft — all solid companies — were going up, so did those companies whose names don’t exist anymore. All kind of fly-by-night companies. People invested money in companies they knew nothing about. They are dot-com, let’s buy them. Big mistake.
The other thing that I learned: Never get into a stock unless you have an exit strategy. You have to know why you are buying into this or that company — if the reason that made you decide to buy no longer exists, you should get out.
Do we want a strong dollar?
Woolfolk: At this point, we want a weak dollar…. Even after its recent slide, the dollar is still overvalued. Our fiscal deficit has reached 4.5% of our gross domestic product. This kind of deficit is not sustainable in the long run. We used to have huge revenues from capital gains taxes during the 1990s, when people made a lot of money on the stock market. No more. We also have less tax revenues because [fewer] people are working. Unemployment is now at about 6%, an increase of 50% compared to a couple of years ago. The terrorist attacks on September 11th cost us too. The war on terror is expensive.
Is the recession over?
Benjamin: I believe it’s over.
Woolfolk: I agree.
Benjamin: We’re on our way to recovery. The economic environment with the decreasing tax rates combined with the low interest rate set the stage for recovery. Now we have to work on investors’ confidence and clamp down on terrorism. Hopefully the situation in Iraq will improve, and we’ll be able to get our troops out. I believe that the job situation will turn around.
Do you second that?
Woolfolk: Absolutely…. Unemployment is the lagging component in an economic recovery. In other words, it’s the last component to turn around, not the first. Companies hold out to the very last minute before they hire new people. Companies bleed down all their inventory before they start hiring people to get the factories get going again.
What we’re watching are two important indicators. First indicator: two back-to-back months of above-expectation growth. The second indicator, which is less well known, is the Philadelphia Federal Index (measuring business growth), which is optimistic about the economy.
The recent deterioration in the labor market is simply representative of the end of the bear market. It has nothing at all to tell us about the direction of the economy. The stock market is a much better indicator.
Is it time to get in the market?
Benjamin: Yes. Though again, cautiously. My advice…: Have a plan. Never get into a position, be it long or short, a stock or a bond, without a plan…. Before you get into a stock, know exactly why you’re getting into it. Maybe you’re getting into a stock because you like the management, maybe because the industry is strong, maybe because you think the stock is undervalued, maybe because it has a good profit-per-equity ratio. If those elements change, those are also reasons for you to get out. If the [CEO] you like gets fired, if the industry gets weaker, if the stock has reached a certain price — it’s time for you to get out.
It always fascinates me: People will go and buy a refrigerator for $800. They’ll search it on the Internet; they’ll find out everything about the refrigerator before they buy it. But the same people will buy a hundred shares of a $50 stock, that is $5,000 — and they won’t even investigate it. It’s your money. Be careful with it….
Chances are you’ll never buy a stock at the bottom or sell at the top. Don’t be greedy. Be happy with a piece in the middle.
Jacob “Kobi” Weitzner is a staff writer at the Yiddish Forward.