Are There Anymore Cockroaches?

Fears crawl into minds of investors
Call it the "cockroach theory." (MarksJarvis)

It's the assumption among investors that if one cockroach takes you by surprise, there are more to come, even if you see no sign of another at the moment. You apply the same thinking to investing as you apply at home. In other words, on some unsuspecting day you are startled by a lone cockroach darting across your floor. You might crush it, but then for days afterward you are leery when you turn on a light at night or open the cupboard under the sink. Anyone with experience with cockroaches knows that if you spot one, there are probably more hiding, ready to surface and rattle you when you least expect it. Likewise, investors worry when financial messes seem to surface. And they now are on guard, fearful of hidden cockroaches related to years of lax lending practices and tremendous borrowing by everyone from financially stressed home buyers to overreaching private-equity firms and hedge funds. The cockroaches that surfaced last year are subprime mortgages and securities based on those mortgages, which are loans to home buyers with weak credit. Some of the worrisome securities are called CDOs, or asset-backed securities called collateralized debt obligations. The value of these securities is based on homeowners making monthly mortgage payments on schedule. But lenders went too far with subprime mortgages, granting them to people who obviously could not afford them. And with defaults on mortgages rising, the securities have plunged in value.

I'm betting that there are few cockroaches left, if any. That's why it's a good time to invest. But hey, so what if there are one or two cockroaches left.