In the last six months of 2006 I spoke with many people who were waiting for a good time to buy stocks. These included both individual investors and professional hedge fund managers.
Here is a helpful, time-saving guide for people on the sidelines. If you find yourself in one of the following groups, I can save you a lot of time. You will NEVER BUY STOCKS AGAIN. This means that you can quit thinking about it and do something else!
- Waiting for a trailing S&P multiple of 6 or 8, because you heard that all of the big rallies start from that point. Well, forget it. You will only see that again if interest rates soar to fifteen percent. That's not going to happen, and if it did, you would be too scared to buy for some other reason.
- Waiting for the U.S. to fix the balance of payments deficit. Forget that hope also. The U.S. cannot "solve" this problem without the active cooperation of our trading partners, especially those in Asia. At the moment it is in their interest to sell us cheap goods and buy our bonds. As their economies develop, the trading relationships will change. It is possible that aggregate foreign investment in the U.S. will never be any smaller than it is today. The rate of growth may decline. (This was one of my HS debate topics in the 60's! You can wait forever to see a change here).
- Waiting for the U.S. to pay off the national debt. It is not going to happen. The best we will ever see is slowing in the rate of growth in the debt. There are growing obligations in Social Security and Medicare. Taxes, benefits, and the retirement age will be changed, probably in incremental steps. The assets of the U.S. government also continue to grow dramatically, something which critics conveniently ignore. Debt levels have not correlated well with stock price movement. Speak out as a citizen, but find a different investment rule.
- Waiting for the official "personal savings" data to show the U.S. as a nation of savers. Forget this one, too. Of all of the government measures, this may be the most misleading since it excludes any changes in asset values. Actual household financial savings have been increasing, but those data get little attention.
- Waiting for peace in the Middle East. While we can all hope for the best, this buying strategy has not given many historical signals.
- Waiting for recession chances to fall to zero, for all economic indicators simultaneously to show growth, and growth at an increasing rate. This must be verified by appearances on Kudlow & Company by the esteemed triumvirate of Ritholtz, Roubini, and Kass. Wow! This one makes the Middle East proposition look easy. For recession chances to fall much below 20%, the expectation in normal times, the economy has to be above the level viewed as non-inflationary by the Fed. By the time it gets there, it is too late to buy.
The news is a little better for those betting on the Presidential Cycle, where stocks were supposed to decline this year, the year of the mid-term elections, providing an entry point in front of the rally in the third year of the cycle. While the decline did not happen this cycle, you only need to hibernate for four years for the next chance.
