"We now see potential for another 25% to 30% downside over the next two years."
-- David A. Rosenberg, Merrill Lynch (NYSE: MER ) in BusinessWeek, Jan. 31, 2008
"A down market is getting baked into expectations. People say: 'I'm not buying until prices are lower.'" [-- Chris Flanagan, JPMorgan Chase (NYSE: JPM ) ]. He predicts prices will fall about 25% until it reaches a bottom in 2010.
-- BusinessWeek, Jan. 31, 2008
"Goldman Sachs [NYSE: GS] forecasts [that] global credit losses stemming from the current market turmoil will reach $1.2 trillion." (Reuters, March 26, 2008)
These are some severe predictions, and since the first two were printed in late January, it was revealed that the Standard & Poor's/Case-Shiller home price index of 20 cities fell by almost 11% year over year that month.
Bubble, bubble, toil and trouble
If those analysts are correct, that the housing market's got much farther to fall, then the total effect on the credit markets will be obscene. Of course, with the exception of Goldman, these are the same large investment banks that have already taken billions in write-downs, because of their exposure to the consequences they're now warning us about.
This leads to an obvious and perhaps paralyzing question: If these "experts" weren't accurate with their predictions a few years ago, why should they be any more accurate today?
There is no good answer
Unfortunately, I have no more insight into timing the housing market than the investment banks do. Instead, I'll offer four tips to remember as you grapple with the battered housing market and the downward pressure it's put on stocks:
- Learn from the investment banks' mistakes.
Wall Street analysts, who are well paid to follow the ups and downs of the markets, are no good at timing those markets. We amateurs should let them play their prediction games alone.
- Don't take on more debt than you can handle.
Bear Stearns (NYSE: BSC ) and countless homeowners learned this lesson the hard way. In the housing market, that means not taking a loan just because you can qualify for one. In the stock market, it means not trading on margin, no matter how sure a stock seems to be.
- If you lost significant money in the housing or stock markets this past year, don't gamble to try to get it back.
As tough as it is to accept, realized losses are sunk costs. You will only compound those losses if you put your capital at excessive risk in order to "break even." The best way to accumulate wealth to is to pursue a disciplined investment plan with regular additions of new money to the market.
- Take advantage of panicky investors to position your portfolio for the long term.
Just as homebuilders such as Toll Brothers (NYSE: TOL ) , KB Home (NYSE: KBH ) , and Pulte Homes (NYSE: PHM ) are desperate to unload inventory these days, many investors are looking to get their money out of stocks. That momentum has the potential to push the prices of great companies down to historic lows. So make a list of great companies you wish to own, then buy them if they get cheap.
See you in three to five years
The key to that last point is not only to identify great companies, but also to have the patience to wait for the right price.
If you're looking for recommendations of great companies that already look cheap, you can join our Motley Fool Inside Value investing service free for 30 days. Advisor Philip Durell and his team are focused on profiting from today's pessimism and finding the best values in today's market. Click here for more information.
Anand Chokkavelu does not own shares in any companies mentioned in this article. JPMorgan is an Income Investor recommendation. The Fool has a disclosure policy.