What it means to you

Warren Buffett's advice to "look on market fluctuations as your friend" sounds good in a finance textbook, but it might give pause when your finger is about to click "buy" on a day the Dow falls 500.

Still, that's what many financial pros recommend even as market fluctuations run rampant, mighty corporations topple, Washington rewrites the book on corporate welfare and some "safe" investments begin to look as junky as AIG stock.


"It's not dissimilar to some other times in the past when markets sell off because the news looks bad and then - three years later - you look back and see that would have been a good time to make investments," said Brian Rogers, chairman and chief investment officer at T. Rowe Price Group, the big Baltimore-based mutual fund house.

Here's the rationale for buying a prudent basket of stocks and bonds now: In the wake of the market turmoil that began in March, they're much cheaper than they were - even with the recovery late last week.


On Friday, the government finally moved to try to broadly solve the mortgage crisis instead of playing Whack-a-Mole, one pesky bank at a time. And the U.S. economy has proven extraordinarily resilient to previous financial catastrophes.

But knowing when markets are down and knowing when they have hit bottom are different things. Many financial specialists believe there is more damage to come, last week's heroic gestures by policymakers notwithstanding.

"We're just not convinced that the government's actions today really change the landscape in a material degree," Christopher Mutascio, a banking analyst for Stifel Nicolaus, said Friday.

"I hate to kind of rain on the parade a little bit, but I think there are still some long-term economic questions."

Such as: The details of Washington's grand bailout scheme have yet to be worked out.

The housing disaster, which triggered the broader economic crisis, isn't nearly resolved.

Home prices continue to drop.

Defaulted mortgages continue to accumulate.


The government has rescued or seized major Wall Street financiers, but hundreds of regional and community banks are still vulnerable. Many analysts expect commercial bank and savings-and-loan failures to increase in coming months despite Washington's ministrations.

By many accounts, the modern financial system has never been under so much stress.

"Having been in this business for 25 years, I don't know that I've ever seen a week like the one we just went through," said Geoff Carey, a partner and strategist at Brown Advisory in Baltimore.

And last week was only the latest in a string of once-unimaginable business collapses that keep prompting references to the Great Depression of the 1930s.

Loaded with debt and invested heavily in mortgage securities, the Wall Street investment house Bear Stearns nearly went bankrupt in March before it was rescued with federal support and a buyout investment from JPMorgan.

Bear's implosion proved to be a prelude to this summer as well as an echo of the past. The deadly trigger was essentially a bank run, which caused so many depository institutions to fail in the 1930s. As creditors lost faith and withdrew their loans, Bear found itself without the necessary capital to survive.


Wall Street houses have gone belly-up before. But the number of gargantuan bank runs, collapses and emergency mergers in the past month has exceeded anything in living memory - Fannie Mae, Freddie Mac, Lehman Brothers, Merrill Lynch, American International Group.

Not to mention Baltimore-based Constellation Energy, whose own financial bets with borrowed money forced a shotgun marriage agreement with Buffett's MidAmerican Energy Holdings on Thursday.

The degree of government intervention at the uppermost heights of finance is unprecedented. The American taxpayer is now a shareholder in Fannie, Freddie and AIG. Taxpayers bear trillions in liabilities for rotten mortgage-linked investments at those companies and all across the economy.

If Washington were to take over a few car companies and maybe Microsoft and Hewlett-Packard, the United States would be competing with China as the world's premier socialist nation.

"This is probably the single biggest government intervention in the markets ever," said Hugo Warns III, director of research at Stifel Nicolaus in Baltimore. "We're in uncharted waters from anybody's perspective."

It'll all be worth it, many analysts believe, if it stops the bleeding. Without government action, the worry is that confidence would disappear across the economy, that consumers would stop spending and that bankers would stop lending even if they had the money to do so.


The trick is making the rescue work - first by stabilizing mortgage defaults and home prices, then by helping the economy detox and rebound in 2010. Many economists fear the precedent of Japan, whose efforts to prop up bad banks and soured loans in the 1990s were prelude to more than a decade of stagnation.

But they're also cheered that Federal Reserve Chairman Ben S. Bernanke is an expert on the Depression and that Washington has now trained all its resources on the problem.

"The Fed and the Treasury had to get beyond lurching from crisis to crisis and put in place a more systemic fix," said Nariman Behravesh, chief economist at Global Insight. "This was needed. I think the markets will stabilize. I think the panic selling is probably behind us."

Maybe that depends on the definition of "panic."

"It would be surprising if we saw this thing not have a few significant pullbacks in the near term," said Brown's Carey.

"This is not going to be a straight and smooth road."


Optimists such as Price's Rogers point to year-over-year declines in the inventory of new homes, falling mortgage rates and indications that home-price trends are improving in some cities.

The United States' adjustment to housing pain, he says, is further along than in many other countries. He rejects the Japan comparison.

"We're such a different country - positive population growth, more entrepreneurial culture, more risk-taking," Rogers said.

These days the usual investment mottoes apply: Look for good management track records and low expenses if you're buying a mutual fund. Consider buying stock index funds - expenses are low and indexes never go bankrupt.

For individual stocks and bonds, buy a diversified portfolio of companies with solid balance sheets in good businesses. Don't invest if you can't let the money sit for at least two years, and preferably much more.

Given that the population is expanding, economic growth will accelerate at some point, and managers and workers haven't stopped making the country more productive, those who prudently buy stocks today will surely make money at some point. It's just impossible to tell how long that will take by looking at previous experience.


Because, as Buffett also said, "If past history was all there was to the game, the richest people would be librarians."