By Michael Lewitt, Editor, "The HCM Letter"

Now that the Wall St. powers-that-be (those that remain employed) have awakened to the dangers of their previously reckless lending practices and structures, we can expect a contraction of available credit just in time when the opposite is needed. As PIMCO's Bill Gross wrote in his January Investment Outlook (in his characteristically reticent manner): "Throw in an embarrassed regulatory network consisting of the Fed and Congressional watchdogs asleep at their post, but are now more than willing to display their prowess, and you have a recipe for credit contraction, a run on the shadow banking system...."

The point is that liquidity is generally withdrawn from the system at the worst possible time, i.e., when it is most needed, plunging the markets into a crisis of their own making. For those investors with liquidity and calm nerves, this is the time pounce. Whether it is financial stocks such as Merrill Lynch (MER) or Citigroup (C), or bank loans trading well below par, or Collateralized Loan Obligation liabilities with investment grade ratings trading at junk bond spreads, out-of-favor securities will produce out-of-the-park returns for those with the gumption enough to ignore the crowd and put their money to work in the current panic.

We would like to say a word about "picking the bottom." Many investors who have ventured into troubled waters are currently nursing large losses. Bank of America has just purchased the rest of Countrywide Credit after seeing most of its initial $2 billion investment wiped out on paper. Citadel Investments' foray into E-Trade is currently far under water.

Market Sell-Off: Brief Moment in Time

But investors need to understand that the current market sell-off is only a brief moment in time. One of the most valuable attributes an investor can bring to the table is historical perspective. The key to long-term investment success and wealth building is not "picking the bottom." The key to success is making sure that you take advantage of the opportunity to purchase an asset at an attractive valuation before the opportunity disappears. It doesn't matter that you could have purchased the asset for a lower price; often in waiting for a lower price, you can miss the opportunity completely. In the end, the only thing that matters is what you pay for something and what it's worth in the end.

Right now we are seeing a fire sale in certain assets - financial stocks; bank loans; CLO liabilities; certain types of financial portfolios. The opportunity to purchase these assets at these low prices is going to be fleeting. In three months or six months or a year, investors are going to look back and kick themselves if they fail to act today and invest.

The forces at work in the world today - globalization, technological advancement, free trade, etc. - are so much larger than the subprime meltdown and the daily machinations of the U.S. stock market. This is why Warren Buffett has been so successful - he has always been able to look through the short-term noise to the longer trends and pick up values when everyone else has been wringing their hands about current events that are really just distractions from what is really going on.

Who to Watch

That's why Mr. Buffett and Jamie Dimon at JP Morgan Chase and Goldman Sachs-trained John Thain at Merrill Lynch and Ken Griffin at Citadel and the folks at Goldman Sachs are the people to watch and follow and invest in and with, in the current environment. Others that HCM would watch are Peter Thiel at Clarium Capital, who has been dead-on in predicting long-term investment trends, and Boone Pickens who has made his greatest fortune late in life and Jim Rogers.

There are others who we are leaving out, but the point is that conventional thinking is not going to cut it in the current environment. Portfolios need to be aimed at the future and the future has little to do with what is happening today with the subprime mortgages or whether or not there will be a recession in 2008. Those are short-term problems that serve as distractions from the real long-term opportunities for those looking to build businesses and portfolios for the ages.

(Reprinted with permission from The HCM Market Letter, January 14, 2008)