Friday, May 1, 2009

psychology & Wells Fargo @ $7.80/share

It’s funny how emotions and psychology influence us all as investors. Depending on one’s personality type, investment time horizon, future outlook, and current general state of mind, one can be desperately bearish or exuberantly bullish in the same stock market environment.

What investor’s have been through over the past 2 years is nothing short of one of the steepest, gut wrenching stock market declines ever. The S&P 500 index plunged from an all time high of around 1,562 in October of 2007 down an astonishing 57% to around 666 in early March of 2009. Most of this precipitous decline came after September 15, 2008 when global financial services firm, Lehman Brothers Holdings Inc., which was founded in 1850, filed for Chapter 11 bankruptcy marking the largest bankruptcy in U.S. history.

Since early March a fairly significant relief rally has been built on the back of optimism for economic stabilization, and mild recovery. The market seems to be telling us that the next great depression and other worst case scenarios have been ruled out. The financial system is not collapsing, and some sparse ‘green shoots’ of recovery are starting to poke through the dirt and dead matter that toxic debt and upside down mortgages have left strewn around the world. The S&P is now up a full 30% from the depths of March. Some financial stocks like Wells Fargo, General Electric, and Manulife Financial are up as much as 156% from their single digit lows. If that wasn’t the bottom, this is a ride that investor’s will probably want to get off of.

For long term investors that were buying stocks as they fell, or maybe well into the market bottom they took heart in the fact they were buying when pessimism was abound and stocks were surely cheaper than they were at any time over the past decade. How those same long term investors are feeling now that stocks are 30% to 156% more expensive in the case of Wells Fargo is how psychology really wrestles with us as investors. I would imagine that many investors are now feeling frozen, and their appetite for buying into this market has waned. It is a little bit like a deer in the headlights, or better yet a deer that just got hit by a semi and survived.


Frog of Finance said...

It is indeed thougher to add money to the market. After such a fast run-up, it is tempting to pull some of the money out and wait for the markets to go back down to put it back in.

Nurseb911 said...

I've trimmed MFC once after buying a whack under $10 and I might have to do so again soon if the price continues to appreciate. Nothing's changed in my analysis, but a stock making up more than 5% of my portfolio makes me nervous. There are lots of companies trading at equal or greater valuations that I'll be more than happy to invest more equity into as I trim strong positions.

Sampson said...

It certainly is nerve-wracking! Seems like you're calling a bottom MG.

I truely hope things are on the way up, but didn't BOA and Citigroup JUST fail the stress test as of last week?

I own both WFC and GE, and although I continue to believe they are strong companies and will come out even stronger than before this recession - its tough to not feel uneasy when WFC has obviously taken some 'liberties' with how they reported the Wachovia losses.

You've summed up my sentiments exactly - paralyzed because there is evidence that nothing has really improved enough to warrant the rally, but the greed... ;)

I am very tempted to start dipping my toes into some of the conservative names/industries which have not benefited so much (in fact, many MCD for example) has come off a little bit despited the broader rally.