THIS IS NOT INVESTMENT OR TAX ADVICE. THIS IS A PERSONAL REFLECTION ON INVESTING. RELY ON NOTHING STATED HEREIN.
"You unlock this door with the key of imagination. Beyond it is another dimension--a dimension of sound, a dimension of sight, a dimension of the mind. You're moving into a land of both shadow and substance, of things and ideas. You've just crossed over into the Twilight Zone."-- Rod Serling
"I made my money by selling too soon.....I never lost money by turning a profit"---Bernard Baruch
As my longtime readers know, I am not a skittish investor. I started this venture four days after the flash crash, held steady during the tax debate, two European debt crises, the Egyptian uprising, the tsunami--you name it. But, I am now spooked--spooked by, of all things, my own government. Oh, I don't mean the Kabuki theater that has dominated Washington since John Adams moved there--I mean the current, conscious decision to destroy wealth. On the left, it is borne of a sincerely held belief that salvation rests in the redistribution of wealth. On the right, it is a similarly sincerely held belief that the government is too big and too intrusive. But whatever the philosophical underpinning the result is the same---the real threat of wealth destruction.
As late as Wednesday, I believed that a compromise on the debt ceiling would be reached. But, the revolt of the Tea Party combined with the President's demagoguery caused the market to drop 200 points that day. This of itself was not surprising, but the pervasiveness of the losses across my extremely diverse portfolio was stunning. Everything was red. I went back to my year long records and tried to find some cognate, and finding none my disturbance heightened. The next day dawned with a rise in the market, and I took advantage of it by selling everything but oil, tobacco, utilities and gold, all in advance of the cancellation of the vote on the Boehner bill. The next morning, I noticed a tone of concern on those upon whom I look for guidance--many of whom had gone to cash. Once the market started to climb Friday mid morning, I sold everything but gold.
My reason is simple. I am willing to risk the occurrence of a "black swan"(an unpredicted and unprecedented event such as the tsunami or the Egyptian uprising), but I need not and will not suffer through a knowing and purposeful sail into the unchartered waters of a default by the US government. Remember, Magellan and Capt. Cook are celebrated for trailblazing on their missions of discovery, but each met with an unsavory end (actually their endings may have been savory since each was eaten by cannibals). To mix metaphors, I am not Rod Serling--the Twilight Zone holds no appeal to me. Oh, and if you think the really smart guys know what will happen in the event of a default, I suggest you read "Too Big to Fail" the recent best seller that recounts the disastrous decision made by the Fed, the Treasury and all of Wall Street to let Lehman Brothers declare bankruptcy. The ensuing game of musical chairs left the taxpayers without a seat, holding the bag for several hundred billions of dollars of TARP exposure; all, while their 401k's tanked.
I wish no one ill. I hope that I am wrong and that sanity prevails. But look at the risk/reward equation. By selling, I capture my hard earned, handsome profits at the cost of commissions (which at $7 per trade are inconsequential) and some capital gains tax in my personal accounts, much of which are long term. If calm prevails, I will re-enter at or near where I left---the market is not going to spike. If chaos ensues, I will be sitting pretty with plenty of powder to strike when the time is right. I don't want to feel like the millions of investors who still have not recovered from the backwash arising from the Lehman bankruptcy.
This exercise serves as a reminder that contrary to the conventional wisdom, individual investors such as yours truly have a decided advantage in times like this. I am nothing, if not nimble. If I were running someone else's money and had preached to them a "long term" approach similar to the "buy and hold" philosophy so often invoked in earlier times, I would be nervous. Last night, I slept very soundly