As I pointed out in a parallel post, I recently drove from Chicago to Phoenix and had ample time to listen to podcasts and catch up with a range of financial and business news, among other things.  While listening to one of the several Wall Street Journal podcasts, I was startled to hear the narrator state that even Warren Buffett had been wrong about his recent call on the stock market.  If you didn’t catch the reference, it was a response to Buffett’s op-ed in the New York Times on October 16, in which he said that he is betting on American equities.  I suppose the point of the podcast was that the markets have been very volatile and unpredictable over the last few months.  Quite an insight.  What’s shocking to me is that Warren Buffett is undoubtedly the most scrutinized investor in history.  That is not hyperbole.  There have been other investors that have outperformed the market on a sustained basis, and I’m not even suggesting that Buffett is the most successful investor of all time.  That’s impossible to determine.  However, we’ve never had the multitude of channels of information that we now have.  Despite the irony of it, given his lifestyle, he is indeed a celebrity investor in a time of massive media access.  The point of all this is that most people who spend any time paying attention to the Buffett investing philosophy know that he wasn’t calling an absolute market low in October.  He was simply acting on the belief that the market as a whole was undervalued, and he was acting greedy in a time when others were acting out of fear.  Could it become more undervalued?  Maybe.  Could it gain 20% the day after he decided to jump in?  Perhaps.  Which, incidentally, would mean that he would have missed that upside had he not been in the market, which is the whole point of his article.

Before I continue, let me point out that one doesn’t have to be a Buffett observer to understand his perspective when he chose to buy into the US stock market.  His rationale wasn’t shrouded in Greenspan-like rhetoric.  To quote from the article:  “Let me be clear on one point: I can’t predict the short-term movements of the stock market. I haven’t the faintest idea as to whether stocks will be higher or lower a month — or a year — from now. What is likely, however, is that the market will move higher, perhaps substantially so, well before either sentiment or the economy turns up. So if you wait for the robins, spring will be over.”

So why is this aggravating to me?  I guess the real answer to that is that the media is perpetuating a sentiment of fear that feeds a cycle that can be dangerous to all of us.  From a more applied perspective, though, I think it causes people to act in a way that runs counter to what is in their best interest.  Without doubt, times are tough.  The question is, what are you going to do about it?  That brings us to the point of this post.  The discussion on the podcast set me to thinking about who is in a position to benefit from the current economic and psychological environment.  I’m not referring to what companies or industries do well in a down market, or which hedge funds are poised to reap the benefits of the fear that has swept substantially all of our markets.  I’m thinking more about individuals.  Many of us had a significant percentage of our assets in the stock market heading into this mess.  There are things we can do, especially at year-end, to harvest tax losses and such (see your financial advisor for help with this), but unless we’ve been sitting on cash for the last year or so, our net worth has decreased, probably by a lot.  In Warren Buffett’s case, the pile of money to which he was referring was in his own account, which is typically invested in government bonds.  In other words, he was sitting on a pile of money that was not ravaged by the recent stock market decline.  That’s nice for Warren Buffett and his heirs, but who else is in a position to take advantage of this situation?
Retirees are certainly the class that has been the hardest hit by this.  They have little opportunity to recover from an investment standpoint, and in many cases can do nothing to enhance their income at this point.  As retirement tends to last a lot longer than it used to, many retirees have had some exposure to the stock market, so they’ve felt some pain.

People nearing retirement are in a position that is similar to retirees, except that they may have a better chance to recover because their time horizon may be a bit longer, and they generally will have the option of working longer than they had planned.  Not a great scenario, but it’s good to have options.
Those of us who are in the accumulation period of our lives are better poised to benefit from the current scenario.  In general, we may have been hit hard by the declines in our 401ks and the 529 plans we’ve set up for our children’s education, but we’re also typically investing on a consistent basis, which means we’re taking advantage of some fantastic bargains at present.  I know it doesn’t feel very good right now, but people really do build wealth in times like these.  The worst thing we can do is put our money in cash equivalents or over-allocate to fixed income.  I will say that there are a lot of opportunities in bonds right now as well as stocks, however, and you should discuss that tradeoff with a financial advisor.

This brings me to group of individuals who I think are in the best position to establish a firm financial foundation for the future in this environment.  I’m going to be specific, but pieces of this are relevant those who share some attributes with the profile I’m specifying.  Young, dual income couples who are professionals and have not owned a house are in the sweet spot to benefit from this crisis.  The housing market is down, and the government really wants you to purchase a home.  That is not a new concept; there are powerful tax incentives for all homeowners.  But if you’re willing to buy before July 1, 2009, the federal government wants to give you an interest-free loan of $7500.  More on that later.  In addition, you’ll have two incomes to pay your bills, and you likely both have some sort of defined contribution retirement plan to which you can contribute, i.e. a 401k.  Here’s the thing:  as much as I’d appreciate you doing your part for the economy and buying that $50k BMW because you just got a big raise, don’t do it.  Get a used Toyota and invest your money.  It will probably be a while until we see a better time to invest, and how much happier will you really be with an expensive car?  Likewise the home electronics, etc.  Think hard about the personal utility you’re going to realize from the expenditures you make.  I’m not suggesting that your only concern should be building wealth, but I do believe that you have a unique window of opportunity to maximize your investments and establish a framework that can lead to financial freedom in your future.  There are some tremendous bargains in the stock market right now.  Ignore the news and invest aggressively with money you don’t need in the short term.

As for housing, in most parts of the country there are many opportunities for patient investors.  Unfortunately, some of these prizes come in the form of bank-owned properties that are the result of somebody else’s misfortune.  Regardless, the government wants to give you an additional $7500 on top of a mortgage deduction to stop paying rent and start building equity.  I say…do it.  You don’t have to buy your dream house at 25 years old.  If you’re savvy, you can buy a relatively inexpensive home to live in for a few years, and it can then become an investment property when you move on to something else.  I realize that $7500 is not a ton of money relative to home prices, but it’s a boost, and it goes a lot farther today than it did 2-3 years ago.  With that said, let’s talk a bit about the high-level parameters of this tax credit.

• It’s only available for first-time homebuyers, or those who have not owned anything for at least three years.

• The home must be, or have been, purchased between April 9, 2008 and July 1, 2009.

• If you’re single, your income must be below $75k for the full credit.  If you’re married, combined income must fall below $150k.

• This is essentially a loan.  You must pay it back, interest-free, over a 15 year period.

Of course, you shouldn’t over-extend yourself to purchase a home.  Keep your payments within 28% of your gross income.  Again, that should be much less problematic than it was a couple of years ago.

As I indicated earlier, if you share any attributes with the profile I’ve described, you’re a candidate to benefit now from this crisis.  Without question, there is a lot of fear impacting the economy right now, and it’s certainly not totally unfounded.  It is, however, very influential in terms of our overall economic health.  If people are too afraid to buy, companies don’t realize revenue, they have to lay off workers, unemployment rises, and things just get worse.  Today, the risks we face in most markets (i.e. the stock market, the housing market, the bond market) are significantly lower than they were a couple of years ago, when prices were astronomical relative to the intrinsic value of these assets.  That’s a simple concept, but very hard for most people to internalize.  If you can do that, you stand to build a strong financial foundation for your future.