Guzzo the Contrarian

The House of Representatives surprisingly rejected the current version of the Wall Street bailout plan today and the markets reacted accordingly.

The Dow Jones Industrial Index and S&P 500 Index both closed today with their worst point drop EVER. The S&P 500 also ended the day with it’s largest percentage loss since the 1987 Black Monday crash. The Nasdaq Composite wound up closing the day with it’s biggest loss since the Internet bubble burst, and ended with the 3rd biggest percentage loss in it’s history.

For the year, the Dow is down about 22% and both the S&P 500 and the Nasdaq are down approximately 25%. These losses don’t even include those incurred since the market high of almost one year ago. Fear and panic have gripped investors, and they’ve finally capitulated.

This is the moment that I’ve long anticipated.

I moved my money out of the markets in mid-2006, when conventional wisdom dictated that the economy and markets would soar forever. As most successful contrarian investors do, I remained patient, stuck to my guns and endured the expected “lack of credibility” and consensus disdain during that period of time. I was confident in my independent analysis and assessment of the economy.

Having had my whole portfolio positioned 100% in cash for over two years, and now feeling vindicated that my predictions have become reality, I moved my entire portfolio back into the markets today, about 30 minutes before close. Mike’s marvelous market-timing adventure has ended.

I exchanged my whole retirement portfolio from Vanguard’s Prime Money Market Fund (VMMXX) back into Vanguard’s Target Retirement 2025 Fund (VTTVX), where I originally had it before moving out of the markets.

I haven’t yet calculated the exact return, but it was a profitable market-timing adventure for me. I moved my portfolio out of VTTVX at a NAV of $11.96 in 2006. I then earned approximately a 5% return on my investment in VMMXX through 2006-07, which eventually decreased to around a 2-3% return through 2008 because of Fed intervention in the markets. I moved back into VTTVX today at a NAV of $11.12.

It’s not a killer return on my investment, but it’s a better return that I would have gotten if I left it where it was, and I didn’t lose any money during that period of time.

So, does all this mean that I think we’ve reached a market bottom?

No one can consistently predict exact tops and bottoms. The markets may still have further to fall, but my goal was to reinvest in VTTVX once it’s NAV dropped below $12.00, and today’s knee-jerk market reaction to the failed bailout made my decision easier. The market fell far enough for me to feel comfortable with my decision to re-enter. However, I do believe that we’re more closer to a bottom than farther from a bottom.

While I have been consistently bearish since starting my blog, and I think the economy is in a recession, I don’t believe the government’s assertion that we are facing a crisis not seen since the Great Depression. That’s just an administrative political spin, that a lot of investors are buying, in order to gain enough power to bailout their corporate cronies. I believe the markets could correct themselves without any government intervention. However, I do see another more-reasonable bailout plan being approved in the near future, which should have a positive influence on the stock market.

Since my previous post about this bailout included an historical reference from the 1930′s, let me follow-up with another, but opposing, historical perspective from the 1930′s, borrowed from FDR’s first inaugural address:

So, first of all, let me assert my firm belief that the only thing we have to fear is fear itself — nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance.