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CNN Live Saturday

Interview with David Caruso

Aired July 27, 2002 - 17:15   ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
RENAY SAN MIGUEL, CNN ANCHOR: Well, corporate accounting scandals are a big reason why the stock market has been suffering despite an apparently strong economy. So where does that leave you in trying to figure out what to do with your money?

Dave Caruso, not to be confused with the TV actor, I'm sure our David Caruso would not walk away from a hit TV show, is a certified financial planner in Boston. He and Robert Powell co-authored a book called "Decoding Wall Street," so we're going to ask him to do a little bit of that for us today.

Mr. Caruso joins us from Boston. Thanks for being with us today.

DAVID CARUSO, COAUTHOR, "DECODING WALL STREET": Thank you. I'll put on my decoder ring right now ...

SAN MIGUEL: Yes, please do. Yes, we need some help here. So if the economy is about the fundamentals, it's about the reports we get from the government every month on unemployment, on, you know, durable goods, manufacturing, that kind of thing. And if the market is about kind of the short-term emotional roller coaster, you know what is the disconnect that's going on here right now?

CARUSO: Well, you know there's a lot of working parts, as you can well imagine, in the stock market. What's happening is that you have the things that really drive ultimately the markets, and that is earnings and economics, and you're absolutely right. We declared a year ago March that we were in a recession. We've gone through that, and we've had a couple of very good numbers on the economic standpoint.

But you know what Wall Street says about that? We don't care. That's old news. That's what's happened. What Wall Street is always looking at is what's going to happen going forward, so the earnings that are coming out now were 6 out of the 10 companies are reporting better than expected earnings, and the economy is clicking along. That's what happened in the past.

So Wall Street is always six to nine months ahead of what's happening to earnings and the economy, and even though September 11th was horrible, we had a market increase back at the end of September. So last September the market was saying things are going to get better. Well in fact they did get better for the stock market, but the markets started pulling off because it probably had some fears going forward that these earnings aren't going to be here and they're talking about the proverbial double dip. So again, the market's always trying to be ahead and trying to predict what's going to happen, not what has happened.

SAN MIGUEL: You know, when they say that, you know the markets have factored in some of the news about the fundamentals of the economy, that's what you've just explained it sounds like.

CARUSO: Yes.

SAN MIGUEL: So tell me, are there any, though, constants? Are there any tried and true things that always happen either with the market or the economy that investors, that main street investors, can kind of latch onto to help them determine where things are going to go in 6 to 12 months?

CARUSO: Yes, they'll follow last year's winners. I mean I hate to say it, but that's really what happens. People have a tendency to look in the rear view mirror when they're trying to invest. So right now a lot of people are clamoring give me some safety. Give me that real estate stuff that hasn't gone down. Give me those bonds. Give me that gold.

Well you know what? Those were the performers in the past. Unfortunately, those will probably not be the performers in the future. So what investors have to be very, very careful for here is not jumping out when they should be getting on board.

You know there's an old saying on Wall Street that you should be fearful and -- excuse me, you -- when you're looking at your investments. Investors are greedy when they should be worried right now and worried when they should be greedy. And we are at that point now where they're very worried, and that's probably a pretty good time to be an investor, not jumping out and going into bonds, which are now trading at about 30-year lows.

SAN MIGUEL: You know a lot of folks would say, would look at the markets right now and say it is, you know it's bargain time. It is time to go bargain hunting here, but with the headlines that are coming out, you know I mean should people just sit tight in the investments where they're on right now, or I mean there's all this talk about asset allocation. You just mentioned bonds. You know, how would you guide folks to go through the rest of the year in this market?

CARUSO: Well Renay, it's time for a gut check. I mean they have this thing called the efficient frontier, and all it says is that there's low risk, low return, high risk, high return. It's a very simple chart that really shows where you should be.

Unfortunately, people only do this in really bad times. But you now have to find out what this efficient frontier is, what your risk- return ratio is, what your asset allocation is. Find that spot from the bottom over here with low risk to the top with high risk. Find your spot on that curve, and stick to it. That's what people don't do. They make moves, unfortunately, at the -- for the wrong reason at the wrong time. So if you're at the right place on that curve, stay where you are. If you're not, go out and find out what your sleep quotient is and start reallocating that money and looking forward.

SAN MIGUEL: And on that note, we will have to leave it there. But we do want to mention the book is called "Decoding Wall Street".

David Caruso, thank you for joining us today. We appreciate your advice.

CARUSO: Thank you Renay for the invite.

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