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As someone whose high tech portfolio is down 35% in just a month, I definitely feel the pain. On the other hand, The Foolish Four is up today and is up almost 9% for the month. Should we sell tech stocks and stock up on blue chips? Well, I suspect that a fair number of folks will do that. When the market gets jumpy, you often see a "flight to quality."
While this is good for our Foolish Four numbers, it has a predictable feel to it. For the last several years we've seen tech stocks sell off in the spring and again in the summer, but when the year is over, they have managed to trounce everything else. And every time, excitable media types proclaim it's the end of the bubble.
It may well be the end of the bubble. Despite the OPEC production increases, continued high oil prices could slow things down just like they did in the '70s, and the growth of the GDP (Gross Domestic Product), which was running at a 7.3% annual pace during the last quarter of 1999, could prompt the Federal Reserve to raise interest rates again, although they may instead be inclined to see if high oil prices work to slow things down instead.
Then again, it could just be more of the same. The latest crisis always feels like "The Big One" until it passes. And they always pass, some just pass more slowly than others.
I'm not worried about oil prices or the Fed or the tech bubble. But I am worried about the market. Here's why. Margin loans at brokerages have increased 50% in the last six months. The total amount of stock bought on margin is still very small. I'm not concerned about margin call contributing to a stock market crash like 1929. But what I did find worrisome about that figure was that it seems to be an indicator of the mania about investing that seems to be taking over our culture.
The more people read about 20-something billionaires and IRA millionaires (yes, I've contributed to that!) and stocks that triple over night, the more they feel that they are missing the boat. And, if they aren't investing at all, that's true. Unfortunately, that kind of feeling leads to reckless investing. Instead of starting off with something like The 13 Steps to Investing Foolishly, where readers are advised to settle their debts, start a savings plan, and THEN invest, starting with something simple like an index fund, they look for the latest Internet initial public offering (IPO).
Even experienced investors are feeling that a perfectly respectable return a few percentage points above the market is not good enough. This can lead to very bad investing decisions.
Margin is an easy and cheap way to boost your returns AND magnify your loses. Today, with tech stocks bleeding from the ears, the margin calls are going out. Buying stocks with borrowed money means that you may not be able to just wait out a correction. Instead you can be forced to sell stock to cover part of your loan, right at the worst possible time. Margin can turn paper losses into real losses just as fast as you can say "Buy more MicroStrategy."
I hope I'm just preaching to the choir today. If you aren't using margin (and it isn't even allowed in IRA accounts, for obvious reasons), good for you. If you are using a lot of it, well, you probably have a pretty good idea of why it's a bad idea right now.
Fool on and prosper!