A reporter sits down with a local investor to discuss his thoughts on what will happen with the market in the days and months to come.
By Ken Gale /Special to The Malibu Times
While some have urged investors to buy stocks to bolster the market as the patriotic thing to do, Malibu investor Richard Carrigan takes a contrary point of view.
“There were some individuals that said, ‘We’ll be patriotic and buy stocks.’ And what I say to that is, be patriotic but this is not a time to wear your heart on your sleeve. This is a time for investment discipline. You’ve got to invest intelligently. Intelligent investing is the best thing that can happen to the marketplace. You can’t argue with the wisdom of the marketplace. It keeps its own counsel.”
Carrigan has been a professional stock market investor for many years, and ever since he moved to Malibu 14 years ago he has had only one client — himself. The advice he gives is the advice he follows himself.
On Monday afternoon, following the first full day of trading after the stock market’s historic six-day shutdown, Carrigan talked about what it was like. And he offered a professional’s insight into how the market works and what it may do in the weeks and months to come.
“First of all,” he said, “America should be so proud of the way the markets operated today. It was incredible … a testament to the depth of our market place.”
But it was still a daunting challenge for the investor.
“I said to myself, the one thing the market hates is uncertainty and we have so many uncertainties out there.”
He studied “evaluations,” looking for good price-earnings ratios — the measure of a company’s earning power — as well as good management, a good balance sheet and good discipline. “The same yardsticks of investing still apply.”
His analysis: Despite falling prices over an 18-month bear market, stocks are still overpriced. “All bear markets end when evaluations become attractive. And I don’t think they’re attractive yet.”
His strategy: Be very conservative. Carrigan hedges his bets with a very complex and sophisticated strategy, not for the amateur investor. In essence, for every $100 of equity stock he purchased, he put another $80 into investment products such as puts, calls and futures that make money when the market goes down. That’s the hedge. It meant he now had only a 20 percent exposure to the equities market, down from his 32 percent position before the terrorist attacks last week.
“In other words, I was selling,” he said.
Carrigan believes the economy is in a recession. And while he hasn’t seen any panic selling yet, ever the contrarian, he believes that is exactly what must happen to stop the bear market and begin economic recovery.
“What I think will end the bear market will be the ultimate act of capitulation on the part of the public, where there is panic selling. And I think that panic selling will begin on a big volume at sometime between 900 and 950 on the S&P (Standard & Poors market index) sometime in the first quarter of next year.” (The S&P closed at 1038 Monday.)
Things to watch out for: A decline in consumer spending, especially at Christmas time, and a decline in the housing market. He cited a recent Forbes Magazine article that warned there are “ominous signs” that a housing crash is about to happen. Here in Southern California, the Los Angeles Times has reported that brokers and analysts are “cautiously optimistic” the housing market will hold, although there was a 20 percent slump in sales of million-dollar homes this summer that some are worried may spread to the rest of the housing market.
Carrigan’s advice for now: “I think this is a time to be conservative. I would say, no more than 20 percent of your portfolio invested, have 80 percent in cash. And I would say you should be patient and you should study.”