Yes oldbabe there is santa
I wonder why so many rely on the adage: the market bottoms when the hysteria gets manic. Who came up with that? Why do you believe it unequivicably? I know that people behave predictably and perhaps behavioral economics plays into this theory.
I and many long-term investors are less concerned with the possibility of lower prices in the future, than our believe that today's prices represent extraordinary value. The risk of missing out on the sale of equities by remaining on the sidelines is quite large. We have already seen 10% bear market rallies, there probably won't be neon sign flashing. "Bull Market has arrived", instead stocks will continue to go up and I fully expect to see 50% increase in year similar to what was experienced into 1930s. Of course when this occurs is anybody's guess.
However, lets stop discussing price and start discussing value. I think the biggest problem people have in the market is they confuse the price of stock(s) with their value.
Imagine you are a person who really loves to decorate the house for Christmas. Most years you purchase a few new decorations to replace those that are broken, old, or just because you like them. Now most years you know that the week after Xmas stuff is sold for 30% discount, and if you wait until mid Jan there is very short sale for 50% off although often the good stuff has already sold out. The first question is
the value of Christmas decoration lower Dec 26 than it is today? Now your initial thought maybe no the value is the same just the price is lower. But actually a Christmas decoration purchased after Xmas is less valuable than one purchased before. It is pretty useless for one year, and during the next year your circumstance could change. You could move to a different place, marry somebody with the world greatest Xmas decoration collection, or simply decide that you hate decorating for Xmas. The money also could be in your bank earning interest rather than the retailers shop. However since Xmas decoration can easily last for 10 or 20 years waiting a one year to use it is a small loss of utility. Thus buying Xmas decoration after Dec 25 is a better value
.
You decide that are willing to wait for 30% sale right after Xmas, but generally don't hold out for the 50% clearance sales for a variety of reasons. So what happens if this year retailers skip the 30% sale and go straight to the 50% discount. If it was me I'd happily spend the entire Xmas decoration budget immediately, I'd even toy with spending next years budget. I wouldn't worry too much about that maybe in Mid Jan we see 70-75% sale. You know that prices will be double next Dec and I hate to miss out on this sale.
Now back to stocks. First an observation; lets say you own 1000 Spiders (the S&P 500 ETF) you still own the same percentage of the biggest 500 corporations in America and doesn't really matter if you paid $50 a share back in March, 1995, or $150 last Dec or Friday at $88. Your ownerships entitles you to a share of the profits of these companies for the next 10,20,30... years. (In my case I most interested in dividends) Is the absolute value of your 1000 shares lower now back than in Dec 07? Certainly, 2008 earning and the prospect for earnings in 2009 look a lot worse now than they did back in 2007 and dividend payments have dropped by a few percent. Is the absolute value of your share worth now more than back in 1995?. Yes definitely, lets compare some statistics
3/95 GDP 7.3 Trillion 9/08 GDP 14.4 Trillion
SPY quarterly dividends 3/95 $.268 9/08 .69
The USA's GDP has almost doubled, and dividend payments (primarily because corporations have become more profitable over the last 10-20 years) has gone up 150%.
Hence it is clear that your 1,000 shares are more valuable than they were in 1995, and less valuable than they were last Dec. Of course the stock market is based on relative pricing and here the situation is tricky. By most measure whether you value the stock market at a Macro level (Stock Market vs GDP, stock market vs replacement cost) or at the micro level of individual stocks (P/E, dividend yield, Price to Sales Ratio, historical levels) it looks really cheap.
I look at stocks now just as after Xmas sales on Christmas decoration sure they worth less now than before Xmas, but the price discount is so large it worth the risk the future will be different. The stocks and funds I own have intrinsic value, sure panic-struck people may decide to unload them cause they need cash or fear if they don't sell now they will be force to sell cheaper tomorrow. I can't predict when Christmas for stocks will come only that Santa isn't dead
Finally, I'll mention the practical situation. My portfolio like many people is down 40%, if I sold everything and bought US 10 year bonds at 2.5% my income will have dropped to a level which why isn't exactly eating cat food is pretty frugal. It isn't like I am going to Vegas and putting everything on Hard 8. I am holding stocks like Intel, Wells Fargo, Johnson and Johnson, 3M, General Electric, as well domestic and international index funds. They all are paying more than government bonds and most more than CDs.
