Mindmeld, according to statistics you can draw whatever conclusion you want. I am just a Bear of Little Brain, but it seems to me that while 99% of the time it's safe to cross railroad tracks, crossing during the other 1% of the time is likely to be messy.
Rather than rest on platitudes designed to foster a healthy market for mutual funds, we can use the brain we were born with for something other than a willing receptacle for Wall Street's marketing blabber.
Let's take a look around. Equities are trading at a premium to economic value. Business prospects would have to double and prices halve before the majority of NASD companies represent a positive return on investment over 10 years. Even the mighty (worth way more than the peons) are priced at 2-3x what they are worth! And that "what they are worth" estimate includes 30 years of 15% annual revenue growth.
If we believe that regression to the mean is inevitable, and that long term stocks are priced at economic value then we have a dilemma. Either economic value must rise or prices must fall. Or some combination of the two.
But our estimates of economic value assume unusual growth. Yikes! If the market does not plunge, then there is a very real probability of trading sideways for a decade or so and investors still ending up with negative real returns over that interval.
We are now in year two of a sideways market. It's not like longer periods are unheard of.
Time the market? Nah, don't bother. I agree with you there that's a hard thing to do. Same answer, different reasoning. But this isn't so much a "timing" thing as an "odds" thing.
It's like looking at a poker hand of a two, four, eight, ten and King representing all four suits. In such a situation I'd bet less than "average", and way less than holding four aces. Wouldn't you?
Same with the market. Averaging in when the odds are against is just a sure recipe for giving mutual fund managers a percent of your portfolio value annually in "management fees". Just because we are much closer to Dow 8000 than we were last year doesn't mean Dow 7000 won't be even closer to where we ultimately end up during the corrective phase. Which we're still in.
Sure, there is likely to be an economic recovery. Maybe we're even in the middle of one. Great. This means that the 15% annual growth that we need for stocks to still be seriously overpriced isn't completely goofy after all.
But that's not exactly good news. We need to be definitively into a period of well above average growth in order for the markets to be overpriced? Yikes!
The difference between now and three years ago is that a large number of people have figured this out and the number is growing.
Patience. Why should we sigh in relief that a mere two years of aftermath is behind us? Education takes time. Remember how long ago it was when we brought up the whole stock option issue? And main-stream still hasn't wrestled it to the ground. Most folks completely underestimate the amount of time it takes for things to work themselves out. The bubble took 5 years to evolve into maturity.
Personally I think averaging in during this period is a huge risk. Buying is a risk. I'd be taking steps to safeguard erosion of capital through this period. 'Cause to me it's not over yet.
If forced to bet for gains, then I'd be placing my money in the primary market rather than the secondary market (e.g. put my money in real enterprise). And indeed that's where my time and energy is now focused.
Of course, I may be wrong. We pay our money and we take our chances. Meanwhile the circus continues. And the markets go up and down. Despite travelling ten thousand miles in the last month, I find myself right back where I started. Same with the market, it appears.
John |
