Real Men Hedge Their Bets

So Buddha walks by as I'm watching a televised chart of the Dow as it approached 8300 this past August 7. We are at the health club, and we both start chuckling at the graph on the TV screen. Only last April the Dow was under 6400. Nineteen hundred points straight up in a mere four months is a heady trip and a feat to be admired.

"What I don't understand," Buddha says, "is where all this money is coming from." Buddha, a commodities trader, is no slouch in those matters, but this stock market bothers him.

"It comes from Mr. and Ms. America and all the ships at sea," I joke.

"And many ports unknown around the globe," Buddha chuckles. "But wait until the weather changes. There will be a giant sucking sound from Wall Street sooner or later, so get ready to rumble, Ace. As soon as the public is fully invested, things will turn negative and Mr. and Ms. America will be out of luck. Markets thrive on change. They were made to take your money. But most people forget that fact."

That conversation stays with me for the next week, and credit goes to Buddha for giving me the motivation to write this Men column. I'm no fortuneteller, but I know when a market is overripe with risk and should be treated with deference, even cowardice.

I've seen soybeans climb to more than $10 a bushel and corn drop to less than $2 a bushel, priced at the grain bin. But through all the change and chaos of the agricultural market, I have always tried not so much to make a killing as to control my risks. That means I don't chase the market highs, I don't panic at the lows and I always hedge my bets. I am an economically conservative male, in other words, who places survival ahead of glory, covering my ass and never risking too much in a market that seems too volatile for me.

All of which leads me to ask you, good reader: How do you behave in financial markets? Are you a mensch who proceeds with caution? Or are you a child who proceeds with abandon?

FYI, I am writing this column on August 14, 1997. The Dow Jones industrial average closed today at 7942, and we seem to be basking in economically perfect conditions: Inflation is low, corporate earnings are high, consumer prices are steady and there are no threats from he Fed to raise interest rates any time soon. Nothing but net, as the ad says.

But I suggest that the time has come for you to start controlling your risks by taking at least some of your stock-market winnings off the table. Because the stock market, which used to be a more sober and stodgy institution than the commodities markets, seems to have acquired a certain white-powder quality to it these days. You should ask yourself how much more action you need to snort before you're satiated.

Take a look at the history of the Dow Jones industrial average during this century. It is trying to tell us something:

It was not until 1956 that the Dow climbed to the 500 level for the first time. It then took 16 years to double in value, reaching 1000 in 1972. It took another 15 years to double again, reaching the 2000 mark in 1987, but then things began to speed up. The Dow doubled next in only eight years, reaching 4000 in 1995. And then, two years later (in July 1997), it doubled again and reached the 8000 mark.

If the Dow follows this pattern, it should hit 16,000 by the end of next year. Will you remain fully invested in the market on the chance that you might wring every last dollar out of the next high? Or will you grow up and take some protection for your portfolio?

Over the past few years, the American stock market has provided fantastic opportunities for profits, and a lot of guys--including some of my rowdy friends-are betting the ranch that the good times will continue unabated.

But I say these guys are dreamers, unable to acknowledge the inevitably brutal nature of all markets, unwilling to face the harsh terms of a zero-sum game where there's a loser for every winner. They are forgetting that, in the long run, markets are not warm and fuzzy places. Markets can kill.

I know men today who have taken out home-equity loans and are investing that money in the market. They are buying stocks on margin, investing all their savings in index funds, maxing out their credit limits, borrowing on their life insurance policies and their children's savings, selling family heirlooms--doing anything and everything to get more of the action. And, like all druggies, they are in a perpetual can't-lose frame of mind.

I'm told that the Securities and Exchange Commission recently conducted a poll of American investors and found that one fifth of them now operate on the assumption that stock prices will always go up. In short, we have a generation of stock-market junkies, guys addicted to the action, just as we had in 1929.

What will damage this market and when will it happen? Those are irrelevant questions to the hedger. "Something is going to happen, but I don't know what or when," would be his answer. "In the meantime, I'm going to take some of my profits and live to invest another day."

It may come as news to some of my coked-up buddies, but the toughest fact to face is this: In every predepression economy, the working public's liquidity is sucked into an exciting spiral of rising valuations and expectations that seem to be headed straight to the halls of heaven. And only after his worldly worth has been collected (and the financial experts who were hyping the market so relentlessly before are now saying that they saw the disaster ahead of time) does John Q. Public come to realize that heaven has no place on earth--and neither does he.