When You Should Buy Stocks

“Bad times have a scientific value.  These are occasions a good learner would not miss.” – Ralph Waldo Emerson

Markets Make Opinions

“Market’s make opinions,” say the old timers.  But what are the opinions to be made by this ambivalent market?  Are stocks rolling over for a great fall?  Or are they taking a breather for the next leg up?

No one really knows for certain.  Nevertheless, the opinions out there range as far and wide as Wilshire Boulevard.  “Invest in HUGE Bull Market,” screams one headline.  “Two Big Reasons to Worry About Stocks,” cautions another.

An old friend recently told us he’s bullish.  Obviously, the market’s made his opinion…it’s had a nice run over the last two years.  Here at the Economic Prism we find this reason enough to be bearish.  Market’s go up and they go down.  After going up and up over the last two years stocks will eventually go down…at least they should.

So far the adage to “sell in May and go away” has been a valuable insight.  May is almost behind us and stocks, as measured by the S&P500, have fallen 2.6 percent – the most since last August.  While one month does not make a trend…it could mark a turning point.  In good time we’ll know…

But that is what’s so evident and amusing about the stock market…looking back is much easier than looking forward.  The outcome when looking back is always certain and the glasses of hindsight are always crystal clear.  Still, what fun would life be, or how interesting would this little newsletter be, if we didn’t occasionally stand on our tip toes and peer over the horizon?

What direction are the signs out in the distance pointing us?  What should your market opinion be?  These are the questions… Today we’ll scratch for an answer.

Buying and Selling Stocks

There are times to buy stocks and there are times to sell stocks.  Generally, the right time to buy stocks is the wrong time to sell.  So, too, the wrong time to sell stocks is the right time to buy.  Humans, for whatever reason, are hardwired in a way that largely compels them to buy stocks when they should sell and sell stocks when they should buy.

Everyone knew in 1929, 1966, and 2000, that stocks always go up over the long run.  Every mutual fund broker around touted ‘buy and hold’ in the year 2000 with the zealot fervor of a rapture quack.  Yet, if they were worth their salt, they would have advised selling stocks and holding cash or gold.

Because, like buying real estate, gold, or a Picasso painting, investing in the stock market is a fantastic way to build wealth…some of the time.  What we mean is, the stock market, like other investments has less to do with what you buy, and a whole lot more to do with when you buy.

Where stocks are concerned, there will always be several stars that shine brighter in the night sky.  Conversely, there will always be several stars dwindling and fading.  Identifying what stocks will shine brightest in the stock market, and what duds to stay away from, is much more difficult than identifying if the stock market as a whole will go up or down.  So why bother?

Especially since stocks and the broad stock market indexes generally move in tandem.  During an uptrend the brighter stocks will rise further than the index as a whole, but they will still mainly rise and fall together.  Buying the NASDAQ in 1995 was a great investment…buying Cisco shares in 1995 was an even greater investment.  Buying either one in 2000 was more painful than a root canal.

When You Should Buy Stocks

A fanciful bull market run from October 3, 1974 to March 24, 2000 took the S&P500 from 62.28 to 1,527.46…a 24.5 fold increase.  By early 2000 eternal profits – it seemed – would be granted to all creatures just for being ‘in the market.’  Everyone just knew stocks were the guaranteed way to wealth…despite the dark storm clouds appearing on the horizon.

“Markets make opinions,” remember.  After such an agreeable stretch how could anyone of sound mind think any different?

But after topping out in early 2000, the S&P500 crashed 49 percent to 776.76 on October 9, 2002.  It then advanced until October 9, 2007, where it briefly peaked at 1,565.15.  After that it crashed again, closing at 676.53 on March 9, 2009…down 56 percent from the year 2000 high.

In the age of paper money, bear market trends don’t generally include nominal losses.  In fact, the market often appears to be flat, or trend sideways over bear market cycles.  However, in real – inflation adjusted – terms, losses are significant.  During the 1966 to 1982 bear market, there were hardly any nominal losses.  But due to inflation, during that time, the dollar lost 66 percent of its value.

Similarly, during the ongoing bear market that began in 2000, for a brief time during 2007, it appeared the market had recovered its losses – even gained a little.  Yet, when adjusting for inflation, real returns were down; the dollar lost 21 percent of its value during that time.

So is it now the time to buy stocks again?

We don’t know.  But here at the Economic Prism we won’t bet our hard earned money on it at the moment.  The last two broad bear markets in U.S. ran from 1929 to 1949 and from 1966 to 1982.  As you can see they ranged from 16 to 20 years.  The current bear market that began in 2000 is now in its 11th year.  In nominal terms the S&P500 is down 13 percent over this time.  Accounting for inflation the losses are much greater.

Stocks could go up from here.  Perhaps they will…for a while.

But by our estimation it will take another 5 to 10 years before you can pile your money into an index fund and forget about it for a decade and a half while it rises 10 fold or more.  No doubt, by the year 2016 everyone will know stocks are for losers.  That will be an indicator the time is close to buy.

Sincerely,

MN Gordon
for Economic Prism

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