No wonder individual investors have been avoiding the stock
market. In addition to the two huge losses incurred in the past decade they
have to deal with news flow and noise that is bewildering right now. A look at
the popular financial media form just this past weekend is insightful. There
are warnings about substantial pension shortfalls causing a bubble in junk bond
prices. To offset that at one fund manager told Bloomberg reporters that all
the economic risks were priced into the market and stocks were cheap. Some
commentators worried about the fiscal cliff faced by the United States next
year while others are highly confident we will muddle through and the markets
will go higher. Some expect QE3 to push markets higher while other put the
chances of QE3 as similar to the Minnesota Twins pennant chance.
One market guru thinks that a wave of merger activity will
push the markets higher. In ordinary times I might agree as there is a lot of
cash on corporate books and the easiest way to grown in a slow economy is to
acquire new earnings. However political and tax uncertainty will keep a damper
on a corporate activity in my opinion. Many commentators pointed to the companies
beating earnings estimates while other focused on slower sales growth and lower
guidance. The news and advice being thrown around in the media is confusing at
best.
The individual investors I know are not just scared of
losing their money again. They are confused and have no faith in the stock
market or Wall Street. All the things they thought they knew have turned out to
be wrong. Stocks do not really return 10% a year on average all the time for
everybody. Buying and holding an index fund may be cheaper than active
management but that has not worked so well over the past decade either. Diversification
has really just spread the losses around as markets went to nearly perfect
correlations for much of the past 10 years. Pretty much everything they learned
in those college econ and finance classes turned out to be wrong as well. They
correctly suspect that much of the Wall Street corruption they see on the news
has been at their expense and they are done playing the game. They feel like
they do not trust or understand the markets and are no longer active
participants.
I am pretty sure this is the wrong thing for most of us.
Stocks and real estate are still the best way to build wealth over long periods
of time. The key for investors is to change their mindset and forget what they
thought they knew. Prices of even the best stocks or houses in the best
neighborhoods do not go up forever. The time to buy is not just any old day you
happen to have cash but when markets have declined and people are scared. The
time to sell is when everyone else is buying and more importantly bragging
about their quick gains in the markets or flipping properties. Making money is
far more important than being popular or exciting.
John Templeton once said” If you want to have a better
performance than the crowd, you must do things differently from the crowd.” If
everyone is buying dividend stocks and junk bonds you should probably think
about avoiding them. If everyone else loves Google (GOOG) and Amazon (AMZN) you
should consider they are over owned and overvalued. If energy stocks are
trading near five year lows you should think about buying them. If short term
traders are distorting the larger company stocks think small. Think opposite
the crowd, avoid the noise and the hype coming out of New York and DC and focus
on the sectors and assets no one else loves at a given moment in time.
Investors should not give up on the markets. They just need
to educate themselves and think differently than the crowd.
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