Sunday, January 27, 2013

Stock Prices ... Up or down From Here? ... Long Term Up ... Short Term ????

There are two pretty much sure things about investing in stocks. In the long term, they'll do much better than other investments and manage to beat inflation handily. In the short term, they'll fluctuate, sometimes increasing and sometimes decreasing. As a rule, however, the long term trend is always up.

So why the yellow flag today? Well, if you're a long term investor, you can ignore it and stay the course. But if you're a short term player, it's perhaps time to turn a little cautious if for no other reason than things don't always move in a straight line, even if the general direction is favorable. Which for stocks it is -- favorable, that is.

In fact, stocks have done incredibly well the first few weeks of 2013. They did well in 2012 also and have more than doubled since their recent lows in 2009.

So what? Well, the reality is this: lots of individual investors sold near the lows in 2009, kept buying bonds from then until the end of 2012 and now are thinking about buying stocks again. That, my friends, is a loser's game. Don't play it.

Individuals are well known by market professionals as contrary indicators to the market's short term direction. Market pros reason that doing the opposite of what individuals generally do is usually a good idea. That because individuals tend to buy high and sell low. They get scared and sell when the market falls apart and then become greedy and buy when the market has rallied to new highs. Thus, often the best advice is to do what others aren't doing.

Even better advice is not to play the market timing game. By that I mean get invested early in your career, establish a habit of investing continuously, let the rule of 72 work for you and then be ready for a comfortable retirement at the end of the work road.

One sage puts it in chart terms. The market over time moves from the lower left to the upper right of the chart, with the horizontal axis representing time and the vertical axis representing return on investment over that time. Lower left to upper right is real. And here's the evidence.

"Stocks For The Long Run" by Jeremy Siegel has a chart on page 6 which shows the nominal returns of various investments from 1802 through 2006. Here's what the chart says about $1 invested in 1802 would be worth by 2006: stocks - $12,700,000; bonds $18,235; treasury bills - $5,061; gold - $32.84; and the inflation index - $16.84.

When I was much younger, someone much older and wiser told me this about the short term direction of stocks -- "Nobody knows. All we really know is that stock prices, like interest rates, will fluctuate. But over the long run, they will do very well for patient individual investors." That was some of the best advice I've ever received, and happily I took it for what it was worth -- a lot.

So whether we believe stocks will go up or down in the short run, we can be confident that they will tend to go from the "lower left of the chart to the upper right" over the long run.

That said, jumping in and out is about the worst thing individuals can do, so don't play if you can't trust yourself to follow the simple rules of winning in the market. Ok?

As Worries Ebb, Small Investors Propel Markets says this about the strong start to 2013 and the return of the small investor:

"Americans seem to be falling in love with stocks again.

 Millions of people all but abandoned the market after the 2008 financial crisis, but now individual investors are pouring more money than they have in years into stock mutual funds.
The flood, prompted by fading economic threats and better news on housing and jobs, has helped propel the broad market to within striking distance of its highest nominal level ever.
“You’ve got a real sea change in investor outlook,” said Andrew Wilkinson, the chief economic strategist at Miller Tabak Associates.
While the rising market may lift the nation’s collective spirits, it will not necessarily restore everyone’s portfolios. In good times and bad, many individual investors tend to buy and sell at precisely the wrong moments. They dump stocks after the market falls and buy stocks after the market rises, the opposite of what investors aim to do.
Some market experts worry that might be happening this time, too. People who got out as stocks plummeted in 2008 and early 2009 have already missed a remarkable rally. The Standard & Poor’s 500-stock index has soared 120 percent since March 2009, passing the 1,500 milestone. This year alone, the main indexes are up 5 percent. Now, the investing public seems more afraid of missing out than of misreading Wall Street again.
Americans’ latest stock-market romance is young, and it could easily fade before it becomes something more serious. Some market watchers warn that given the big run-up in prices, the market is already ripe for at least a brief correction. . . . 
There is no surefire data to use to gauge the behavior of retail investors. . . . But analysts agree that most indicators point to rising confidence in the market.
The level of bullishness among small investors has nearly doubled just since mid-November, according to a weekly survey conducted by the American Association of Individual Investors.

In the last three weeks, the market data company Lipper reported that $14.9 billion had gone into all stock-focused mutual funds, the most in any three-week period since 2001. Mutual funds focused specifically on American stocks have collected $6.8 billion since the new year, the most in all but one comparable period since the financial crisis.
This comes after investors had removed $416 billion from stock-focused mutual funds since the start of the financial crisis, according to Lipper. Those outflows continued even as the market climbed over the last few years.

 Many retail investors leaving stocks have put their money into bonds, which have historically been less risky. There is now concern that those people could face losses if professional investors sell their bonds and buy stocks, which would push up interest rates and make current bond holdings less valuable. . . .
The S.& P. 500 is close to its nominal high of 1,565 but remains below its record high — reached in 2000 — after adjusting for inflation and taking dividends into account.
Even many optimistic strategists say that a short-term break from the market rally is likely until there are more indications that the economy is growing. And given that January is historically a strong month for stocks, more bearish analysts have said the recent rally is likely to fade. One drag on growth could come from the recent increase in payroll taxes.
There is also a sizable contingent of investors who think that the European debt crisis and United States fiscal position still represent significant threats.
But Russ Koesterich, the chief investment strategist at BlackRock, said that the current threats were “mundane” in comparison to what investors faced the last few years. “We’re not talking about big crises anymore,” he said."
Summing Up  
For long term investors, the market is not overvalued. It's a good time to be invested and it's a good time to resolve to stay invested, even after the fit hits the shan, which it inevitably will from time to time.
And for those who are invested but don't have the temperament to stay the course when stocks get hit, now's probably as good a time as any to sell. That way, when the inevitable correction in stock prices occurs, you won't be agonizing over what to do, and then sell anyway.
As for me, I'm in for the long run and ready for more good days than bad days in the future years.
The odds are always in favor of a move from the lower left to the upper right of the chart, and that's good enough for me.

That said, we'll try to be astute enough to recognize when the market becomes overvalued down the road in a few more years, then perhaps take some money off the table, and wait for the next long term buying opportunity to present itself. It always does.

For now, the plan is to stay the course and enjoy the ride, despite the inevitable volatility in stock prices that is sure to come.
At least that's my plan.
Thanks. Bob.

1 comment: