October 6, 2008--US Congress supports bail-out

Greetings!

The US Congress voted for a second time on the bail-out proposal. As expected, the proposal did pass and the bail-out is now approved by both the Senate and Congress. This clears the US government, on behalf of taxpayers, to begin purchasing sub-prime mortgages from US financial companies in an effort to ease the paralysis that has prevented US institutions from lending to one-another, a practice that happens regularly under normal conditions [you may want to refresh your memory on this by reading my newsletter of Sep. 18th].

The bail-out proposal has stirred a great deal of controversy in the US with some arguing that it was a bad deal for the taxpayer and rewarded incompetent banking executives. Without addressing all aspects of the controversy, let me point out that Warren Buffett is on record saying that, given the chance [which he was not], he would have invested $7 billion of his own money in the bail-out effort. Why? For the simple reason that he things the US taxpayer will end up making a nice return on the sub-prime mortgages being purchased. That is, the bail-out involves paying pennies on the dollar for the sub-prime mortgages and Buffett believes that, in time, those mortgages will be sold for more than the US taxpayer is paying for them.

The example of the US bail-out is being followed in some European nations. Canadian financial institutions had relatively small exposure--or none in the case of TD Bank--to US sub-prime mortgages so, to my knowledge, there is no talk of a similar bail-out planned in Canada.

And what about stock markets? The TSX opened sharply lower today as sellers drove markets down about 1200 points before buyers jumped in pushing the markets up about 650 points before the closing. Sellers and buyers will continue to battle it out and the current fearful environment will probably mean more sellers than buyers for awhile yet. There is always a mob mentality that drives markets in the short term. When fear is "in the air" and splashed across newspapers and TV news, it is contagious and makes it hard to act rationally.

I'll finish this newsletter by quoting Warren Buffett, the most successful individual investor of all time who has built a net worth of over $50 billion [and is giving almost of it all away to charity]. In talking about his investment philosophy, Buffett said--

“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”

Bye for now,

Tom

PS--as you've probably guessed by now, Warren Buffett is one inspiration for my investment philosophy and his life story is a fascinating one [did you know that he still lives in the same modest house in Omaha that he bought for $31,500 in 1958, doesn't carry a cell phone and drives his own car?]. If you would like to read more, check out--

http://en.wikipedia.org/wiki/Warren_Buffett

Tom Buck, M. Ed. CFP
Certified Financial Planner
Assante Financial Management Ltd