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Tuesday, July 31, 2012

It's How You Play The Game That matters


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 They feel like they do not trust or understand the markets and are no longer active participants.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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