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Fifty-Eight years…
And we still have investment cycles.

Without a doubt, we live in a very bountiful world. All be it, not a perfect world.

For every one of you who have been in my office, you will recall that I keep a chart of the stock markets front and centre on the board room table. A snap shot of the history of our financial markets and economy.

What you may not recall is that this chart tells us that wealth increases 5%, year after year, adjusted for inflation of course. But this gift comes with strings attached!

Wealth does not uniformly increase at a 5% rate. Some years do better than others, some parts of the world grow faster than others and some investments or asset classes appreciate more than others.

And sometimes we see no growth at all. In fact, sometimes we see asset classes such as Gold, Real-Estate, Bonds and YES even the STOCK MARKETS plunge faster than the tallest roller coasters.

      Looking back

All you need to do is consider the following series of events and you will realize that the financial landscape has changed significantly over the past year:

• The U.S. government took control of troubled mortgage lenders Fannie Mae and Freddie Mac
• The U.S. government became AIG’s largest shareholder
• Short selling of financial stocks was temporarily banned on concerns that the practice added to the disintegrating value of investment and commercial bank stocks
• The U.S. Administration proposed and congress expressed support for the U.S. Treasury authority to purchase up to $700 billion in troubled mortgage-related assets

     How did we get here?

The markets have shown serious strain for more than a year now, largely the result of years of lax credit practices (lending money to those who could not afford it) associated with the housing boom south of the border. Mortgage loans of questionable quality were bundled into complex, hard to understand securities and sold to various financial institutions around the world. What was once AAA rated debt is now below “junk” status, often with market values at $0.00. Meaning no one will take your paper off your hands at any price!

     Enter the Liquidity Crisis

With this illiquid paper sitting on the balance sheets of the firms that manufactured, bought and sold them, they are now forced to raise capital (money) in an attempt to shore up their balance sheets eating up capital and driving down profits. Not to mention, preventing normal trading amongst the financial firms due to solvency concerns. In September of this year all of this came to a head.

Suffice to say, the pillars of Wall Street – first Bear Sterns, now Lehman Brothers, Merrill, Washington Mutual and Wachovia – are crashing into the ground, the global economy is heading towards a slow down at best, perhaps a recession.

     Should I be throwing in the towel?

No - If anything, now is the time to be looking for top-quality companies selling at a discount to their intrinsic value (believe me they are out there!), not fleeing for the perceived safety of bonds or GICs. I can guarantee you that if you dump your stocks and equity funds today you will miss the inevitable rebound in the markets.

I can also promise you that rebound will come, unless the stock markets suddenly decide to break with over a hundred years of history. And if that is the case, I can guarantee you that not even you’re GICs and bonds will be worth the paper they are printed on!

Not to belittle the impact of the current credit crisis but I don’t believe that to be the case. The silver-lining here is the government’s quick response. Washington’s swift reaction to recent developments should give investors some measure of comfort. The FEDERAL RESERVE, Department of the Treasury, SEC and assorted government offices have acted decisively to address the immediate issues affecting Wall Street and the financial companies. I’m confident that they will address the long-term problems as well, namely;

1. Keeping people in their houses and paying their debt, in part at least

2. Temporarily removing the offending paper from the balance sheets of the financial companies so that they may again, begin extending credit

Inevitably the housing market will right it self and this credit/liquidity crisis will come to an end.

Finally, Globalization is not going to end! And the global economy will continue to grow. With growth comes opportunity and prosperity.

I know it doesn’t feel like it, but the markets are presenting us with a rare opportunity. In times like these, most investors panic and sell. Behavioral economists have identified a consistent bias they have dubbed regency bias, where investors project the current market conditions way too far into the future. This causes them to seek safety from the volatility instead of leading them to see the market decline as a gift that allows them to buy stocks at vastly lower prices.

Each and every crisis appears radically different from all the catastrophes that have come before – at the time you are going through them. The U.S financial system is burning through something like 2 trillion dollars in capital, and that is a truly awful thing, but it was just a few short years ago, between 2000 and 2002, when 4 trillion went up the flue on the NASDAQ market alone, and the economy came through that fiasco just fine.

     And I leave you with this:

As I did back in February 2003, (reprint of the Financial Guide below) I urge you to do what I am doing, over the next few months use your cash earmarked for savings to purchase some shares in some truly great businesses at these discounted prices. These nonsensical markets will not last.