Sunday, November 09, 2008

One Factor On My Mind With This Market

I am a bit of a contrarian when it comes to buying stocks. There are many factors I use when evaluating stock investments and a large number of them indicate some stocks are trading at compelling valuations. However, one factor that is on my mind is the fact many investment newsletters and magazine investment articles indicate investors should be buying stocks at this time. Historically, market bottoms do not occur when investment pundits are bullish.

I took a look at an article in the April 17, 2000 BusinessWeek titled, Time To Keep A Cool Head. In the article it was noted:
"The most dangerous thing an investor can do is overreact in this kind of market," says Rick Adkins, a certified financial planner with Arkansas Financial Group. Instead of panic selling when share prices are plunging, wait a few days until you can make a rational decision to sell, not an emotional one.

Reasons not to sell are often forgotten at times of market turmoil. For one, many institutional investors are "looking to tap the irrational behavior of the individual investor," says Adkins. That means savvy money managers may be waiting to gobble up the shares you sold at bargain prices. That seems to be what happened earlier this week, when Janus Capital Corp. and others began buying stocks voraciously around midday Tuesday.

...In the last decade or so, the stock market has usually rebounded within days of a big sell-off. You can't count on a fast snap-back every time, of course. But if you start dumping shares, odds are you'll buy them back later at a higher price. (emphasis added) "If you thought that the stock you bought was good value yesterday, it's likely to be a good value today unless something fundamental has changed in the company's prospects," says Harold Evensky, a partner with Evensky, Brown & Katz, a financial planning firm.
At the time the above article was written, the S&P 500 Index was off a little over 8% from its high. Subsequent to the article, the market declined an additional 30+%.

What are some of the investment advisers saying today?

T. Rowe Price. Market Turmoil: T. Rowe Price's Perspective (PDF)
“There are very attractive opportunities now,” says Bill Stromberg, director of global equities and of global equity research. “Companies in the heartland of industrial America, many technology companies, and many health care companies are thriving in this environment and reporting pretty good earnings. We’re trying to take advantage of widespread selling to pick them up cheap.
Charles Schwab & Co. 6 Tips for 401(k) Investing in Today's Volatile Market
  • I agree with this article's advice on rebalancing ones investment portfolio back towards ones target asset allocation. I think a key question is where are we in the investment cycle as noted in the below chart.
(click chart for larger image)

market cycle graph
BusinessWeek, September 18, 2008. Buy, Sell, or Stay Put? Advice From The Pros.
Stephen Wetzel, a financial planner and adjunct professor of financial planning at New York University, is far less circumspect. "I'm buying like a crazy man: value stocks, financial services, value funds, muni bonds, some international small cap. You don't get opportunities like this very often."
Certainly we have seen a substantial pullback in the global markets over the course of the last 12-months. And, having broached this topic, maybe we are at the bottom. I would be more encouraged if more bear market articles were being written though. On the other hand, selectively building positions in high quality companies that have seen their valuations decline to attractive levels, is likely an acceptable strategy at this point in the market cycle.

No comments :