Tuesday, October 23, 2012

Four Ways to Dilate Your Pupils

These are nervous times for investors—we fear the bear [market] hiding behind every bush. Perspective can be hard to come by when you've got that deer-in-the-headlights feeling. So let me help you dilate those pupils by giving you four reasons to look beyond the coming election, the "Fiscal Cliff", the European debt crisis, and so on.

First, keep in mind that the human condition is such that we tend to feel (not necessarily believe) that whatever is happening at this moment will happen forever. Of course, whether it's good times (tech in the '90s, real estate in the '00s) or bad (the '90s tech bubble burst, the '00s real estate bubble burst), we know that's never the case. The economy, like life, is forever a moving target.

Second, per this article, companies are currently sitting on record cash. If you had your druthers, would you prefer to own stocks when companies are flush with cash, or largely spent?

Third, would you rather own stocks when the retail investor has thrown all caution to the wind (tech in the '90s, real estate in the '00s) or when, per this video, he's so afraid of stocks that he won't invest even to collect the match in his 401(k)?

And fourth, bonds are pricier (yields lower) than they've been in the history of mankind. Not only do they offer virtually no [growth] competition for stocks, they represent capital (like all that cash on corporate balance sheets) that will someday look to expand its horizons.

So do I know for sure that this is the ideal time to buy stocks? Of course not. But I do know that pendulums swing, that there's an enormous amount of cash in the system earning less than nothing (inflation adjusted), that smart investors go against the retail-investor herd, and, once again, that bonds presently offer no competition for stocks. And I also know that things can indeed get worse before they get better.

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