The Investor

Buck Fever

Stock picking, not deer hunting.

By 1.6.09

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"Bailout Plan Rejected, Markets Plunge, Forcing New Scramble to Solve Crisis" -- Headline, Wall Street Journal, September 30, 2008

With the year coming to a close, I had commenced my seasonal ritual of cleaning out my office of the many articles, reports, unread magazines and numerous items, the relevance of which had totally escaped my memory.

It is a daunting task given my inherited pack-rat gene, the gift of my beloved father who has just about every will he ever drafted for a client, dating back to the Eisenhower administration, in his basement. I swear, he still has an original edition of Scott's Antarctic journal down there, a childhood gift, the very same edition the doomed explorer's widow edited to keep from the British public evidence of her husband's less than stellar performance. What a prize that would be -- if we could find it.

As I started culling the piles of debris scattered across my desk, bookcase, and computer table, I came across a trio of front pages from the Wall Street Journal, Washington Post and New York Times. All three displayed banner headlines for September 30, 2008, on the failure of the House of Representatives to pass the first $700 billion bailout (a "financial-rescue package" as described by the Journal).

"Defiant House Rejects Huge Bailout; Stocks Plunge; Next Step Is Uncertain," wailed the Times.

"House Rejects Financial Rescue; Sending Stocks Plummeting," roared the Post.

The Journal echoed these lamentations with "Bailout Plan Rejected, Markets Plunge, Forcing New Scramble to Solve Crisis."

Noting the identical observation of all three papers, that the stock market had plunged and plummeted in the wake of the bailout package's defeat, I examined the stories and graphs more closely. As of that date, the Dow Jones Industrial Average sustained its biggest point drop in history and its biggest closing decline since the reopening of the markets after 9/11. The Dow finished the day 7 percent down with a 777.68 drop to 10365.45.

The Standard & Poor's 500-stock index fell by almost 9 percent to 1106.42, the third biggest decline since World War II.

Thinking back to the panic and urgency of those days, I was not alone in feeling that sense of doom conveyed by these headlines. No wonder, Congress, with the help of some carefully targeted earmarked pork, managed to muster the votes to pass the bill on the second try. Yet, with the benefit of hindsight, we had not yet seen the worst of the stock market losses, not by a long shot.

By the close of 2008, the Dow had cratered to 8776.39, a decline of -33.8 percent. The S&P 500 came crashing down to 903.25, a loss of -40.5 percent for the year. The NASDAQ crashed landed to 1577.03, a staggering drop of -40.5 percent. Internationally, some exchanges sank even lower.

The sad truth is that the really stupendous stock market losses came after the bailout package passed Congress and not before. It all reminds me of an old joke. "They told me if I voted for Barry Goldwater, we would wind up with half a million men in Vietnam. I did, and we do." If you didn't support the Bush-Paulson bailout, no questions asked, the stock market would lose over a third of its value. Get it?

Of course, one cannot infer a causal relationship from a temporal succession of events. To believe that the cock's crowing causes the sun to rise is to fall prey to the logical fallacy, post hoc ergo propter hoc ("after this therefore because of this"). But one has to wonder if we might have been able to engage in a more extended, in-depth debate over the ends and means, the pros and cons, the right and wrong as well as the good, the bad and the ugly of this massive intrusion of the federal government into the nation's financial sector and the taxpayers' wallets.

Just before commencing the paper purge of my office, I had been reading a story in this month's Money magazine on fundamentally sound companies that have experienced unprecedented loss of value in their stock. For instance, Intel (now at "the top of the semiconductor food chain"), which suffered a bear market loss of 52 percent, has an unbelievable price-earnings ratio of 9.6 and a stock price of $12.49.

American Express, which generates more of its income from fees rather than interest on its credit cards, saw a 70 percent market loss and trades at only 7 times earnings. So on and so forth.

Then my son-in-law starts telling me the same thing about Apple, its freedom from debt and customer loyalty (all my kids swear by MacBook and iPod), etc. Soon I am starting to get that strange feeling -- the shaking, the sweating, the breathing, the tension -- which numerous deer hunters have described as they sit in a tree stand, freezing their whatever off, waiting for that once-in-a-lifetime shot at that massive, antlered buck, you know, Bambi's elusive ol' man.

This is a new feeling for me. For almost my entire adult life, I have avoided picking individual stocks as a game for suckers or truly brilliant investors such as Warren Buffett or Peter Lynch, who made Fidelity Magellan Fund into such an icon for many years.

I drank all the Kool-Aid served up by the likes of John Bogle, founder of the Vanguard Funds, and Burton G. Malkiel, the author of A Random Walk Down Wall Street, now in its umpteenth edition. I walked the path of efficient markets, no-load index funds and the management of risk through slavish mimicry of the entire market, not just the domestic market but global markets, nay, inter-galactic markets. I was, ontologically, mindlessly, a Boglehead. The market is smarter than any one of us.

It is astounding what a 30-40 percent drop in market value will do to a man. Intel, American Express, Apple! Buy low, sell high. Open an account. Call a broker. Have nice chat with that pretty blond on Charlie Schwab's website. Where will it all end?

It will all come to tears.

(Mr. Mehan is still paying college tuition for the youngest of his seven children in Northern Virginia.)

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About the Author

G. Tracy Mehan III served at the U.S. Environmental Protection Agency in the administrations of both Presidents Bush. He is a consultant in Arlington, Virginia, and an adjunct professor at George Mason University School of Law.