Skip to comments.Market Correction Makes Stocks More Attractive
Posted on 07/28/2007 8:44:50 AM PDT by frithguild
THE FINANCIAL MEDIA is so promiscuous in its use of negative language to describe the stock market when prices go down. Stocks "slid," "plummeted" or even "collapsed." You hear it all the time, even when nothing really happened.
So what words are left to describe a really big down day like Thursday? How about, "Stocks became a better bargain than ever!"
Isn't it true? Isn't it all a matter of perspective? If you already had all your money in stocks, then of course you're sorry to see prices fall especially after a day like Thursday.
But if you have cash in your pocket and you'd like to buy stocks for the long run, or add to an existing portfolio, then Thursday was a home run. Your world just got a lot sweeter.
Same thing with home prices. If you're looking to buy, the so-called collapse of the so-called housing bubble is great news. Your dream home just went on sale! Attention all you Kmart shoppers.
Then again, all of this depends on an important assumption: You have to believe that the decline in prices is temporary. You have to believe that it doesn't reflect some kind of horrible permanent change in the economic environment.
For example, the stock-market crash of 1929 turned out to be no bargain. If you'd bought stocks at the end of that disastrous October, you would've had to endure terrible declines in value during the Great Depression, not making a sustainable profit on your investment until 1943, according to data from Ibbotson Associates.
But the stock-market crash of October 1987 was a very different story. The market decline then was far worse and much scarier than the one that ushered in the Depression more than half a century earlier. And, it turned out, much more of a bargain. Had you bought stocks at that month's end, you would've shown a profit after just three months.
So don't be afraid just because you see stocks slide, plummet or collapse. Not even if you see them get nuked, trash-compacted, reamed, steamed or dry-cleaned.
Don't just look at prices, and for heaven's sake don't let yourself be stampeded by the overheated language of the media. Ask yourself as objectively as possible, "Why?"
If the answer to that question is that the world really is getting a lot worse, then step aside as a buyer or consider selling before things really do get worse. But I've learned that usually the world isn't getting anywhere near as worse as the stench of panic in the air would make you believe.
Remember, even if the world is getting worse, you'd still want to be a buyer of stocks provided that their prices fell enough to more than compensate for the deteriorating backdrop.
I'm sure I'll get plenty of emails accusing me of being a perma-bull. Especially from perma-bears who've been so terribly wrong for so terribly long. A day like Thursday is a great relief for these people, who can myopically convince themselves they've been right all along.
But I'm no perma-bull. I have no stake in stocks being up or down, per se. I just want to call it right. And I never want to forget one fundamental truth about investing: No matter what, stocks always have a positive expected return.
Stop for a minute and think about that seemingly simple statement. It's actually quite profound, and it's something that most investors have never really thought about consciously.
If markets are at all efficient, then risky securities like stocks must be priced so that the people who hold them the people who take risk will get rewarded for that risk-taking, at least on average. If the fundamentals get worse, then stock prices will fall so that from their new low level investors will still have a positive expected return.
Yes, that's an argument for always holding stocks. But believing that argument doesn't make me a perma-bull. It just means I think that over time I'll get rewarded for taking risk.
Markets aren't always perfectly efficient, nor are they perfectly right. Sometimes the risks in the world aren't fully appreciated by markets or at least the risks I think are out there aren't. Then I'm bearish. Sometimes the risks in the world are overemphasized or at least the risks I think are out there are and that's when I'm bullish.
I interpret Thursday's big drop in stocks, in combination with Tuesday's big drop as well, as simply creating a higher expected return for investors daring to buy stocks in an environment that has suddenly gotten riskier. Not really worse, just riskier and more uncertain.
In the last week the bond market has become dysfunctional. Because of losses in the subprime sector, bond investors are suddenly reappraising their willingness to bear risk. That means lots of bond issuances, including some massive ones designed to finance a couple of high-profile private equity deals, haven't been able to get done.
So right now nobody knows what deals can get done and at what prices, and what deals can't get done. That's a bad thing for markets that rely on clear, simple, liquid trading conditions. Now big plans involving many billions of dollars are disrupted. Those disruptions then disrupt other plans, and so on in a daisy-chain of escalating uncertainty.
But so what?
We're talking about a disruption in the markets, not a disruption in the real world. Markets are amazingly adaptable, and they will adapt to this uncertainty and quickly transform it into certainty.
Stocks have dropped in response to heightened uncertainty, not actual deterioration of anything in the real world outside of markets themselves. When that uncertainty is resolved, stocks prices will quickly rise, because the real world will be, and has been all along, a very good place. Earnings are improving, jobs are plentiful and the economy other than the small portion of it devoted to housing is accelerating.
I really think this is good news. It's scary, to be sure, but if you believe as I do that you get paid for taking risk, then take some. And get paid.
Donald Luskin is chief investment officer of Trend Macrolytics, an economics consulting firm serving institutional investors.
Thats what they said last week.
Why not? It works so well when describing how our Armed Forces are doing in Iraq, no?
There is the view that stocks have another 500+ points to go before it bounces. I wouldn’t jump in the market with both feet right now, but it is a good time to start accumulating a position and watch where it goes. Buying on these dips is where the real money is made. The US economy with excellent growth, low inflation, and low unemployment is going fairly strong even with the drag on the economy from housing. The market will be above 14,000 soon, the question is will it go below 13,000 first.
THE MUSIC GOES ROUND AND ROUND
I blow thru here
The music goes ‘round and around
And it comes out here
I push the first valve down
The music goes down and around
And it comes out here
I push the middle valve down
The music goes down around below
Below, below, deedle-dee-ho-ho-ho
Listen to the jazz come out
I push the other valve down
The music goes ‘round and around
And it comes out here.
The market goes round and round and the Street makes money
I didnt hear anything about stocks “rocketing” or “soaring to the top” last week either.
The market will go down another 1,000 - 1,200 by the end of the year.
I would wager large sums that the DOW will be well over 14,000 by the end of the year.
me too....despite all the nay saying from the MS media the DOW has been moving right along...
“Same thing with home prices. If you’re looking to buy, the so-called collapse of the so-called housing bubble is great news. Your dream home just went on sale! Attention all you Kmart shoppers.”
.....with housing, I’m not as convinced of the buying opportunity....a friend of mine thought he was going to clean up by buying a foreclosed house....the home owner had really let it go to hell ‘cause he figured he was going to get foreclosed anyway so he might as well live rent free for a year....then after the foreclosure the guy wouldn’t move out so my friend then had an eviction problem!....all that glitters ain’t gold in the foreclosure market.
It hates uncertainty, and we have a VERY uncertain 2008 election. You may be an optimist.
“The only news is bad news.”
Otherwise, it would be “good” news, or useful information. What one has to understand about the “news” business is that it is to sell you useless information for “free,” so that you need ever-increasing more information, until you are so overburdened and overwhelmed with raw data, you can’t see the truth of anything.
All prices are “impermanent,” and so rises and declines are not “temporary,” but the truth of the matter for the present. Economies change and grow, and so what is needed and profitable to do changes and evolves. That is reflected in stock market prices as an indicator of what is profitable to invest in at the time.
Right now, money is shifting out of the tangible assets like real estate and commodities and moving back into other innovations for adapting to the world. In many places, real estate has risen so fast and so high that nobody can afford to buy it anymore — and so it is unlikely to continue higher.
The better deal is to move to places of opportunity — like Texas, Ohio, Pennsylvania, North and South Carolina, New Orleans, etc., and avoid the high priced communities in which one’s entire salary goes towards the rent. Meanwhile, there are always places where the living is “free” — by comparison. But those places eventually get discovered and fully valued and creates the next sector “rotation.”
The strength of the economy is this diversity — to shift resources from and to productively with some dislocation and trauma until people figure out what the “market” is trying to tell us. Foremost, the market (prices) is information of what is economic to do — rewarding those who move in the direction of greatest opportunity and no longer rewarding those still trying to make a buck essentially perpetuating the problems of society.
These shifts are fundamentally healthy, causing and enabling the development of resourceful people who get better at processing information — so much so, that it is obvious that the old sources of information (mainstream media) now seem vapid and irrelevant but are still used by the demagogues of the world thinking to exploit it one more time before it disappears entirely.
That’s one of the big themes the old media is not going to report on because it is the news of their demise and passing.
“The kind is dead; long live the king.”
Mixing metaphors here:
As we say in Hawaii,
“Da Kine is dead, long live Da Kine.”
Just bookmark this thread :)
Cool, me too. I have a long collection of old bookmarks from doom and gloomers who were way off.
Yeah, just like those nuts that said the housing market was going to collapse. Bunch of idiots.
LOL, did you actually read their predictions? I always said there would be a slowdown and a soft landing with small declines or flat pricing. Granted the slowdown looks like it is going to last longer than I thought, but I will match my predictions against theirs any day. They were talking about 40% price drops in 6 months. Prices have only fallen very slightly nationally. The doomers were talking the housing market taking the economy into the next great depression. We still have 3.4% GDP growth. Sorry, the housing market is not pretty, but it ain’t the doom that it was painted by the bubble heads. So far it has been a soft landing as I predicted.
Eh? No doom and gloom here. I am just being realistic. The market will correct itself by about 8-9% by the end of the year.
I know, you weren’t really being a doomer, but the market is in much better shape than you give it credit. Overall, corporate earnings are coming in better than expected. There are problem areas in financials, housing, automotive, but there are more areas like technology, aerospace, defense, agriculture that are doing great.
Oh, and my housing prediction is -10% over the next 2 years as a nationwide average. And then flat for a couple of years after that. And it will only be that bad if government doesn’t come in and “fix” the mortgage loan process.