2:17 p.m., Dec. 5, 2008----A timely talk, “Rational Investing at a Time of Financial Crisis and Panic” by Donald Puglisi, University of Delaware MBNA Professor Emeritus of Finance, attracted a large audience of members of the University of Delaware Association of Retired Faculty (UDARF) at the December luncheon meeting.
It was not a rosy picture, and Puglisi's talk, although humorous, was forthright and peppered with words like “abysmal,” “if you think that's bad,” “ anguish” and “pain and suffering.”
The overall picture
Puglisi pointed out that, as everyone knew, there has been financial panic. Showing charts of the Dow Jones Industrial Average, Standard & Poor's and other indicators, Puglisi said that the interesting factor was how quickly investors have lost value in the equity market in the U.S.
“It's pretty much of a bloodbath, but the anguish we felt in the United States equity markets is being felt all over the world,” Puglisi said, showing other charts involving markets in Europe and Asia.
Puglisi then examined some selected stocks from AIG to ExxonMobil, and Wells Fargo. The fall in stock prices is only one measure of “pain and suffering” we see in the stock market, Puglisi said.
There is also an increase in volatility, what investors perceive future movement in stock prices may be, and this also is a measure of fear and investor panic, he said.
More bad news is coming, Puglisi warned. The real problem in the financial market is in the credit markets, he said. The government has come up with schemes, he said, which have nothing to do with the stock market but the credit market.
He then discussed commercial paper issuance, short term IOUs and an important source of funding for businesses. Starting in 2007, the commercial paper market has collapsed, he said, with the federal government becoming involved as the buyer of last resort.
Puglisi then discussed the housing market and problems with both subprime and prime mortgages, with foreclosures and defaults, where people walk away from overpriced houses.
He touched on consumer credit and consumer confidence, saying the consumer is in a “real funk and we've just been told now we have had a recession since last December.”
How did we get into this mess?
“The blame can be spread pretty far and wide,” Puglisi said.
He cited several factors -- American consumers who had too much debt and not enough savings and investment; the government policy and regulation which encouraged mortgages for those who were not necessarily capable of making the payments; financial institutions that took on more debt than they could manage; mortgage and investment banks creating products no one understood; greedy investors; rating agencies that forfeited their objectivity; and academia for turning out graduates on Wall Street who did not understand finance.
America does not need more regulation, rather it needs more effective regulation, Puglisi said.
Where is this all going to lead us?
“I really don't know,” Puglisi said enumerating the many problems the government is trying to help solve from the fall of housing prices to the rise of unemployment.
What does all of this mean to you and me?
Puglisi said he not have much to say except to repeat what he has told his students and other audiences for the past 30 years.
Emphasize an effective program of investment management of all the financial aspects of life, he said, including debt management, insurance, spending, lifestyle and estate planning.
He said he felt American lifestyles were going to change drastically after these “shocks to the system.”
Suitability to take risks is another factor. Understand that if you take risks, you can lose a lot of money, he advised.
Make critical decisions about investing in stocks, bonds, cash and real estate and have a well-diversified portfolio within these classifications, he said.
Puglisi also suggested controlling transaction costs and paying commissions.
There is no free lunch in investing, more return requires more risk and “if an investment opportunity sounds too good to be true, it probably is,” Puglisi said.
His last bit of advice was to remember, “It's your money and when in doubt, you have the right to say 'no.'”
Article by Sue Moncure
Photo by Kathy F. Atkinson