Fearless Freddies: Bungee-Jumping in the New Economy 

Fearless Freddies: Bungee-Jumping in the New Economy

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      By MARK PENN

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With E. Kinney Zalesne

In these uncertain times, most people are seeking protection and safety from the prospect of even more economic turbulence. But another group is going bungee-jumping into the middle of the financial crisis -- bravely increasing their investments even as the markets and the financial system collapse and gloomy predictions abound.

These "Fearless Freddies" are the ones who had the stomach to invest in Citigroup when its share price dipped below a dollar. They are the ones buying oil (and oil stocks) as it hits new lows. They are down in Florida looking for condos and checking out the foreclosures. They are either the smartest people in this changed economy -- or the dumbest.

Unlike the "New Mattress Stuffers" I wrote about in December, who are loading up on guns, gold and home safes, these investors are hoping that a comeback will come more quickly than most experts expect -- a comeback they hope will make them rich.
Microtrends
[Microtrends]

Forget about huge, sweeping megaforces. The biggest trends today are micro: small, under-the-radar patterns of behavior which take on real power when propelled by modern communications and an increasingly independent-minded population. In the U.S., one percent of the nation, or three million people, can create new markets for a business, spark a social movement, or produce political change. This column is about identifying these important new niches, and acting on that knowledge.

Warren Buffett started out as a leader of the Fearless Freddie movement -- plunking down $5 billion in GE when he got a call from Jeff Immelt and the stock was around $23 a share. GE plunged to below $7, though now is recovering. Warren has been a little quieter lately, but still leading the movement.

It was easy to be fearless when everything looked like it was going up indefinitely -- buying several houses at low interest and flipping as-yet-unbuilt condos seemed to make a lot of sense, even a year ago. In retrospect, that turned out to be the wrong time to make that choice. But is now the right time?

Microtrends is all about looking for counterintuitive patterns. Winning strategies are rarely if ever the strategies adopted by the pack -- but that becomes clear only later.

Most investors are "Go-With-the-Flow-ers" -- they have sold some stocks, held on to others and are just waiting to see what happens before doing anything drastic. They are not controlling their fate and rather are awaiting the outcome to see how they do.

Mattress Stuffers and Fearless Freddies have taken bold and decisive action in opposite ways. As the crisis evolves, they may even switch camps, but they are committed to choosing one serious extreme or the other. They are not waiting to see what happens; they are taking a strong stand that may affect them for the rest of their lives.

President Obama and Treasury Secretary Tim Geithner seem to be looking for Fearless Freddies, given the way they have designed their bad-bank asset plan. The whole idea is to put some more fearlessness into the system -- to get investment houses and hedge funds to invest in the worst-looking assets with some increased government guarantees and assurances. They see nurturing this microtrend as critical to our chances for economic recovery.

Which of these three groups is most likely to come out ahead? I believe that one of the extreme groups is going to get it right, and those doing what the pack is doing will simply wind up on a roller coaster ride to nowhere. If the plan fails, unemployment rises, inflation rises and global despair spreads, then those sitting there with gold and cash will be the ones who succeeded in safeguarding their assets.

But if all of this works to bring the economy back faster than anyone expected, the Fearless Freddies stand to quadruple their assets at a minimum and do even better on a leveraged basis. They are the risk takers, and the system is designed to either wipe them out or make them rich. If they went for Citibank at 92 cents, they have already more than doubled their money. But it took a lot of guts to do that, when everyone was forecasting a Citibank bankruptcy, or nationalization.

Most of the microtrends being created by the financial crisis have been about resetting our tolerance for risk: being more sensible in the economic bets we make, increasing our use of cash, holding off on major purchases. Nearly two million people now work for companies largely owned if not operated by the government, and are now fully accountable to Washington and the political system for every decision they make. We are all learning the lesson that the most well-intentioned quant economists missed -- that there is a lot more risk out there than we ever dreamed. And that a sunny day can turn into a raging tornado faster than anyone could have expected or planned for.

And yet we also have this gut feeling that at the end of the day, it is the Fearless Freddies who are going to make it out of this thing the best. We know that when everything goes down, it is really the time to buy, and when everything goes up, it is really the time to sell. We know it and yet we can't bring ourselves emotionally to do what is likely to be the right thing in either case.

So which of the three crash personality types are you? And have you made a conscious choice? Pick one -- be Mattress Stuffer, a Fearless Freddie, or a Go-With-The-Flow-er, and arrange your life accordingly. If you want to join the fearless group, run, don't walk to the housing and stock markets; buy more financial-sector stocks; and think about starting your own business and leaving your big corporate employers. Plan on inflation not deflation, and buy the car, and maybe the TV set, of your dreams.

Be bold. Running counter to the pack is almost always the key to real success.