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Ted Allrich is the founder of The Online Investor and author of the book: Comfort Zone Investing: Build Wealth and Sleep Well at Night. In this weekly column, he'll offer advice to investors who are just getting started.
Two emotions run the stock market: fear and greed. We've seen greed hit its apex in the late 90's when some stocks with profits were selling at more than 100 times their earnings per share. Others had no earnings at all but lots of "eyeballs" (a new metric for dot com stocks). Unfortunately those eyeballs never got monetized, and many of those wonder stocks are names long forgotten. In hindsight, it's easy to ask: why would anybody buy those stocks?
Yet people did. Lots of people. You couldn't keep people out of the stock market, and certainly not the Internet stocks, the hottest of all. Greed had taken over the market, with everyone believing they could make a fortune from stocks. The madness of crowds was never more apparent. In hindsight. Of course, we're all brilliant in hindsight.
So now that Price to Earnings ratios are in the single digits for many great companies and many of those selling at or below book value, very few people are buying. Many stocks now are bargains. They're on the clearance table with final markdowns taken. Prices reflect the strong possibility that many will go out of business. As they should. Investors have seen the impossible happen: Government Sponsored Enterprises like Fannie Mae and Freddie Mac allowed to go bankrupt. Lehman Brothers, one of the oldest of the large investment banks, disappear seemingly overnight. The largest thrift in the country? WaMu. Glurgh. Drowned in a tsunami of stupid, bad loans. That's why investors aren't buying. Simple.
But buying stocks isn't about one or two years (even three or four) of bad returns. Remember the average return for large stocks over a long period of time (including dividends) is about 10%. That average comes from many years of good and many years of flat or down years. It's an average so many numbers make it up. It's hard to find other investments that average 10%. Of course, you have to hold on to good stocks for years to get that average. And if you started investing two or three years ago, you're wondering about that average right now because you haven't seen 10% up. All you've seen is down.
If you go back to the basic principles of investing, they remind that a well positioned investor has real assets, usually in the form of real estate, for protection against inflation, cash for emergency purposes and living for at least six months without a job, fixed income, both short and long term, weighted for the investor's perspective on interest rates as well as need, and stocks, with stocks consistently providing the best return over a long period of time. That's been proven again and again to be a good allocation of assets.
I can hear the cries now: but that was history. This time it's different. This time we're in a real crisis, one never before seen (not true, the Great Depression was much worse with 25% unemployment...and that lasted from 1929 to 1932 at its depths). Maybe we'll get to 25% unemployment. I certainly hope not, but with California already at 9.3%, there's a chance of it.
Counter-argument: there is a new stimulus program about to be unleashed. If it does the job, more money will be available to borrow at low rates so housing and autos should rebound. New jobs will be created by the government, though they won't be permanent for the most part. They will give more income to workers to spend which will create demand which in turn creates jobs. Whether people will simply save all their new income is up for debate. If they do, it will be a real first for Americans. This new stimulus program should make a difference for economy.
Another, almost more important factor, is that companies are already cutting back, expecting the worst, anticipating a terrible 2009. So they're laying people off, cutting back on Research and Development, and trimming expenses wherever possible. And they're hording cash, just like most of us expecting the worst. Companies don't feel any more sanguine about the future than consumers.
But remember, people still buy groceries and drugs, watch television, and go out to eat, to the movies. The world isn't ending. It's only adjusting to a new reality. Consumers are quickly adjusting their spending habits, at least the ones with jobs. The ones without jobs are downsizing everything, trying to figure out how to survive through this recession, but they still need to buy groceries and pay rent or a mortgage. Companies are doing the exact same thing, expecting the worst, hoping for the best.
The adjustment may not be complete yet. More jobs will certainly be lost. More losses will occur at banks as credit card payments stop and/or mortgage payments. But banks have taken large loan loss reserves against these, again expecting the worst. Will they be enough? Only time will tell. Other industries are doing the same adjustments, laying off workers, trimming whatever they can that's an expense. Those that have done the best job of it will survive, then thrive when the economy rebounds.
It will rebound. There's no question of if, it's a matter of when. If you don't believe that, then you shouldn't buy stocks. In fact, buy gold and hope for the end of the world as we know it. There are a few of those out there already. But the vast majority of investors are simply shell shocked from the reality the market has imparted over the last year, quivering in fear, paralyzed by losses. That's human. If you aren't like that, you didn't have any money in the market.
But there comes a time, maybe not now, but at some point soon, where stocks will make sense again. The companies that cut costs, position themselves for the worst case, and never stop striving to make better products or give better service will emerge stronger. When that time comes, when investors see some facts, not hope, that signal the economy is turning toward the better, stocks will once again go higher. Their returns will be much larger, in percentage terms, since many are starting from some such low prices. The investors who share that vision of the future should own stocks with the caveat that many months or even a year or two may be left before those facts emerge. But they will. And when they do, investors who have stocks will be very well rewarded.
Ted Allrich is the founder of Allrich Investment Management LLC.
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Reader Comments (Page 1 of 1)
2-01-2009 @ 6:20AM
al coholic said...
The new stimulus package will not cure our ills any more than the one attempted during the 1930's did. It took a World War to give us a fresh economic start.
As for unemployment not reaching the levels of the Great Depression, be careful about that assertion because we are not as comparatively well off as you think. Virtually all of the companies in construction, and by that I mean subcontractors, are 1099 entities whose workers are 1099 workers. A large portion of our "service economy" also works that way. These people (though technically they could) seldom apply for unemployment and are therefore currently invisibly unemployed. Add in the part time workers every big firm seems to utilize these days and our unemployment picture looks a lot worse than 9%.
I'm amazed that people are content to look at our unemployment picture now and not take these things into consideration before making any historical comparisons.
You see, back in the thirties it was a much different work environment. Most jobs were manufacturing full time hourly jobs, unlike now, so it is no surprise that a lot of technically unemployed people are not being counted.
2-01-2009 @ 10:10AM
Oceanview17 said...
Yes, buy stocks, brokers have rent to pay!
2-01-2009 @ 11:48AM
Barbara Johnson said...
I wouldn't invest one cent in the stock market. The whole thing is rigged for the benefit of the heavy hitters and we small people don't stand a chance. This isn't even counting the underhanded stuff that goes on. I think anyone who invests in stocks is a fool.
2-01-2009 @ 1:14PM
Frieda said...
Why would anyone want to buy stocks now? Obama has declared war on prosperity in America !!
2-02-2009 @ 6:43PM
Jerry Bluhm said...
I beleive there are real problems with this so-called stimulus plan. Actually, as it stands now, the stimulus plan is only a spending plan. Passed as it is will have the reverse affect on our economy. Americans need to stand up against this greed and stupidity. The country is spending itself into a much deeper hole. We cannot allow the government to spend these amounts of dollars. After all this spending will come terrible times, and this country will be so damaged it will take years to get back to where the economy is positioned now, not to mention how long it will take to get out of this recession.
2-01-2009 @ 2:16PM
BHarrison said...
And with the markets being conservatively projected for another 10% - 20% drop (and even more), NOW is NOT the time to be buying stocks, is it?
Congress' promised FULL DISCLOSURE and TRANSPARENCY hasNOT been provided; and there is apprently no, or very little INTEGRITY in the financial reports of many FI, corporations, markets/ funds. No prudent and rational person is going to invest in such a manipulated, and corrupt market.
The FIs and brokerages want, and need, people to invest in the markets; but they have STILL not done anything to instill INTEGRITY in the market. If they want investors, then they need to provide audited financial reports by reliable auditing firms.
The FIs and corporations continue to "discover new losses" even though they claim to have sound financial records and accounting systems . . . this merely smacks of premeditated, progressive periodic revalations of losses from the "derivatives" FRAUD.
I for one will wait until the market "bottoms out". I'd rather catch the market at 10% of the back side of bottoming out, than at 10% BEFORE the "bottom hits".
The FIs and the corporations have totally lost the "faith and confidence" of the average American investors. Meanwhile Congress has FAILED to implement any new regulations or effective oversight for INSTILLING INTEGRITY in the market.
"Fool me once, shame onyou. Fool me ttwice, shame on me." The Amecian people has had their fill of being duped by the FIs and the corporations.
2-01-2009 @ 3:26PM
vitoalicia said...
Well the bottom line is, you have the government crooks pointing the finger at the cooperate crooks. God help America!
2-01-2009 @ 6:10PM
MC2 said...
Please let everyone that voted for Obama buy stocks as the American dollar is now worthless and inflation will kick in and destroy what the Democrats handouts along with their deliberately running up the pice of oil hasn't yet.
2-01-2009 @ 8:18PM
Bob Knapp said...
I think we'll be OK - most folks are intelligent enough not to swallow the BHO kool-aid. The Democrat base never bought stocks anyway. I am a trader (as opposed to investor). With all that's going on, the first thought is sell short. You will win most of the time with that mindset. The Dems are ruining this country in ways only Chavez, Castro et al can only dream about.
P/E ratios are based on previous 12 mo earnings. Look at forward earnings. A better number is PEG (P/E to growth) - a number of 1 or below is good. I'll bet most PEG are closer to 2. Also the VIX - a high number indicates bad days ahead - 30 used to be high - lately it's been around 50 or higher
2-01-2009 @ 11:46PM
mrfixit said...
This is to MC2, you are a fool!!
2-01-2009 @ 11:56PM
dan said...
When you see the underpinnings of revolution, they are the symptoms of an oppressed, depressed society. Fascism, socialism, communism, religious extremism, and other associated ills grow from a oppressed middle class and working poor that are being manipulated by the well connected elite group that benefit from our taxes, called corporations, banks, and the 1% that have33% of the wealth in the country. Manipulation of the tax code, supply side economics or Reaganomics's, created by Wanniske and promoted by the Laffer curve, was the Republican political ploy to Liberal tax policies that grew out of the depression. The neocons economic delusion of telling you they are going to lower your taxes, and at the same time keep spending, raising the deficit because deficits don’t matter, brought us to the edge of another Republican depression. You would have to be a fool to invest now that you know it's all a ponzi scheme.
2-02-2009 @ 11:48AM
BHarrison said...
The absurdity of this contention is almost not worth commenting on. There is another article on AOL news that advises that 2009 is DEFINITELY NOT a year to invest in stocks in substantially declining markets and funds.
No prudent and resonable person is going to invest in a maipulated and corrupt declining market. What else is there to say?
2-02-2009 @ 12:29PM
RBroussard said...
The markets have to be fixed. The "investor" has been duped. We know what Mozillo did to Countrywide & the public. We know what Thain did to the NYSE Euronext, BAC & the public. We know what Cox did with the SEC & the public. We know what Madoff did to his investors. The playing field has to be level.
This CASINO environment has to stop. Bring back some regulations that will instill "trust" back into the markets. Until you bring back some of the safeguards, the "investor" will stay on the sidelines. Let the traders have their fun, but in the long run, the damage will keep this market in these low trading ranges for some time to come.
2-02-2009 @ 1:47PM
BHarrison said...
Ted . . . go back to sleep on your recliner . . . your advice is rather delusional in consideration of the facts and the projects of the projected continuing decline in the markets and funds throughout 2009.