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If you?ve turned on CNBC or Bloomberg at any point over the past few weeks, you may have noticed that a popular topic of discussion has been whether or not the market has bottomed yet. Indeed, when the market rallied in late October, a number of the talking heads were claiming that as evidence that we had, in fact, seen a bottom.
Now, before we start bashing the pundits, who clearly took the wrong side of that argument, it is important to note that there are a number of reasons to look for a bottom in the stock market:
- The stock market is a leading indicator, and will tend to recover well before the GDP and other indicators take a turn towards positive territory.
- Price/earning ratios (PE) are at near-historic lows, making stocks of strong companies look like bargains, or as one Bloomberg guest put it, ?Cadillacs at below Chevy prices.? (a touch of irony there, given the uncertain fate of GM)
- Several major companies have reported surprisingly strong earnings, including Google (GOOG), Apple (AAPL), and now Dell (DELL). Notice a trend there? Curiously, these are all technology stocks.
- Hedge fund redemptions, or investors withdrawing money from hedge funds, triggered a massive wave of fear-selling, which also correlated with the emergence of the credit crisis. Once the fear subsided, buyers would naturally reenter the market
- A huge mountain of cash is sitting on the sidelines, invested in short term Treasury bills yielding as little as .04%
- That notoriously problematic $700 billion (+) bailout, and the other activist actions taken by our public officials, including the insurance of money-market funds and other savings (not investment) instrument.
Yet today, November 20th, saw the lowest close in the stock market yet. And curiously, many of the TV analysts abandoned their unabatingly optimistic tones and began to throw around ominous terms, such as ?loss of support levels,? ?uncertain environment,? and the ever-insightful observation that ?this is a bear market.? As Han Solo might say, aren?t you glad they?re here to tell us these things? Especially since cnbc.com is now running an article in which three analysts call for a bottom next February, as opposed to the bottom they thought we might have originally reached.
The fact is that no one can time the stock market. The market is the ultimate equalizer. It can make kings and fools alike, create and destroy hopes and dreams in one fell swoop. That may sound awfully dramatic, but if you talk to people who have had their savings and retirements destroyed, it is very, very real. Presently, the bears are the ones in control, a bear market bubble, if you will. People who have bet against and sold short the market, such as hedge fund manager John Paulson, have made small fortunes for their foresight. To mix metaphors, we are in the midst of a bull-market bubble?for bears. Eventually it will end. But if you spend time trying to figure out when, and in what sector it will rebound, the odds are good that you will miss it. For those of us who are not professional day traders or money managers, it is a waste of time and energy.
My best advice? Listen to these words of wisdom from one of the most unique Wall Street books ever published, Where Are The Customer?s Yachts? Or A Good Hard Look At Wall Street by Fred Schwed:
When there is a stock market boom, and everyone is scrambling for common stocks, take all your common stocks and sell them,? he elucidated. ?Take the proceeds and buy conservative bonds. No doubt the stocks you sold will go higher. Pay no attention to this?just wait for the depression which will come sooner or later.? When this depression?or panic?becomes a national catastrophe, sell out the bonds (perhaps at a loss) and buy back the stocks. No doubt the stocks will go still lower. Again pay no attention. Wait for the next boom. Continue to repeat this operation as long as you live, and you?ll have the pleasure of dying rich.
This same advice on stocks can go for gold, real estate, paintings, and vintage Fender Stratocasters. The second you start to chase something you aren?t in control of, the odds are against you. The market will rally, and when it does, history tells us that it will be a violent swing to the upside. But if you buy an attractive asset at a depressed price, and are patient with it, profits will materialize. The American economy is likely to enter a period of economic recovery earlier than the rest of world. The US has had to bear the brunt of the financial crisis for over a year now, but for the rest of the world, it is only beginning. It’s my opinion that this represents an opportunity for value investors, who understand that patience is an investors greatest virtue.
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