In light of today’s (Monday, when the stock market lost 8.8% after the House turned down the bailout bill) madness, I wanted to write to update all our clients. First, I remain optimistic that Congress will pass a bill to address our current financial crisis. Mr. Paulson and Mr. Bernanke may have been been clumsy politicians in this, but their plan will most likely work very well. When run properly, it will make a profit, as both one of the greatest bond investors in the country, Bill Gross, and the greatest stock investor, Mr. Buffett, have stated. But it can only be run properly by someone who knows what he is doing and can act quickly and decisively. Their proposal will work, but they did a terrible job of selling it. Still, I hope they get the chance to fix our credit markets, which they may be able to do very quickly if given the authority. You would be surprised at how this type of economic intervention can work, and Mr. Bernanke may be the greatest expert in the country on how central banks have helped or hindered during economic crises. While I obviously don’t know Mr. Poulson personally, his credentials are impeccable. He sees the picture clearly, as do most members of the Senate. It is a very scary picture that must be addressed immediately!

Most likely, Congress will pass some sort of bill that is just good enough to get us through – by the skin of our teeth. Then our economy will begin what must be at least a fairly slow rebuilding process. However, stocks the fund managers we use at Secure Retirement will begin to grow much more quickly than their competitors, and we will begin to have good returns. That is what I expect to happen.

But as an investment advisor, my first and only “absolute” job is to protect my clients. While I think it likely that Congress will act soon, if they don’t, we will indeed have an economic crisis beyond anything anyone under 79 years old could remember.

Please keep in mind that this is already a crisis. My clients have avoided much of the carnage thus far, but this is looking like an escalating crisis, which may require additional immediate action. Huge banks are going out of business around the world. Wachovia went down over 90% in value at one point in one day – today. And last night one large Belgian financial company, Fortis, went out of business. At the same time, Great Britain was nationalizing one of its larger mortgage companies. And today a number of large regional banks saw shares of their stock plunge 30-60%. This is serious. This is the type of activity, I believe, that often accompanies economic crashes.

We must therefore face this prospect and prepare for it properly. When thinking this evening about what the wisest course would be to follow, I ended up thinking of how I would manage a portfolio if it was my Mother’s. Now my Mother is a good investor, and she hates risk. She has bought and held good real estate for four decades, and I can’t recall of any mistake she ever made. Whenever real estate went down, she bought more. That’s pretty much it. She did that for 40 years and went from poor to very well-off.

In thinking about this, I realized that, in a crisis, I still don’t want to throw the proverbial baby out with the bath water. At the same time, if we’re really facing a possible depression, then I’ve got to make sure every single person in our boat is absolutely trustworthy, because this voyage may take a while.

To begin, I’ve got to make sure my retired investors have enough to live on during these years from their fixed income investments. At Secure Retirement, most of our portfolios for retired investors already own substantial amounts in bonds or fixed annuities. Combined with sales from stock funds I made earlier in the month, our retired investors are well-protected.

My main concern at this point involves our younger or more aggressive clients. While I made all our portfolios safer several weeks ago, if we were to enter a depression, I would want some more safety in all our portfolios. Plus, I would be even pickier about who I would trust to navigate a catastrophe properly.

Specifically, I would sell CGM Focus, which is what I will be doing if Congress doesn’t enact a bill by mid-morning Tuesday. This is a truly great fund, and I hope it goes way up as soon as I sell it, as this will mean the storm-clouds may be passing. However, in recent weeks I seem to have had a clearer picture of our economy than Mr. Heebner. One of the rules I use when selecting fund managers is that they must always demonstrate a greater understanding of the economy than me. Plus, Mr. Heebner is by far the riskiest investment we have – in fact it’s the only risky investment. Since I want to further reduce our risk level right away, this is the one to sell.

This leaves us with a pretty small boat. On the stock side, it’s just Warren Buffett, Bruce Berkowitz, Marty Whitman, and (a little) Eddie Lampert. These are the four I know will deliver us profits in under five years – even if we have a depression. And they are the four I could get my intelligent, highly risk-averse Mother to keep through anything that may come our way!

Richard Morey
Secure Retirement
18 Crow Canyon Court
Suite 300
San Ramon, CA 94583
925-855-4300