A Great Time to Invest? Right Now!

As markets make new highs many traders and investors have been left behind. Some are now considering climbing aboard. Fair enough, markets making new highs usually move even higher. Some worry that they have missed a false rally. Mrs. OldProf is encouraging me to keep it brief for a change, so you can just read the statement below if you want. Those who want some reasoning need to go through the rest. I have summarized the most important current issues as briefly as possible.

This is a good time to invest, and an exceptional one if you choose your holdings wisely.

What not to do

  • Do not worry about what stocks will do over the next ten or twelve years. You can and should revise your asset allocations regularly.
  • Do not obsess about the latest list of alleged “headwinds.” There is always such a list.
  • Do not fall for the pseudo experts on the Fed. Explaining markets by Fed actions alone is simplistic and inaccurate.
  • Do not worry about someone saying the stock market is “not cheap”. None of these methods work in real time and the inventors don’t even follow them.
  • Do not pile onto the crowded trades that worked last year. We are at a point of extreme distortion of sector valuations.
  • Do not let your political opinions undermine your investment success.

Ignore Economic Commentary

Most investors cannot distinguish the good from the bad, so it is better to ignore it! Here is why it is mostly biased and inaccurate.

  • Popular sources have media business models based on selling fear.
    • The biggest investment blog makes millions for the owners. Their readers have made even less than the “zero” quoted in their name!
    • Many prolific writers earn subscriptions, conference fees, and book deals with repetitive crash predictions. You know who they are, and probably read them regularly.
  • Many widely-quoted experts are simply pro-bonds, anti-stocks. If someone sells only bonds or runs a research operation for the bond community, you know what to expect.
  • Many noisy commentators are selling high-commission products based upon fear.
    • Read the fine print on “structured products.”
    • Do not get dazzled by the multi-page annuity proposal. The one where you are supposed to initial each page. Email me first for a second opinion.
    • Beware of gold purchases with big commissions and little liquidity. If you want gold, make sure it is a reasonable part of your asset allocation.
  • Election season emphasizes negative sound bites. Candidate competition, and especially parties out of power, want to paint the worst case. This is not a partisan political point; it happens whichever party is in power.

The combination from all of these sources creates a negative picture that is difficult to put aside – especially since part of the story is true.

The Investment Climate

The current climate has two very distinct parts:

  1. Popular. Anything that has an attractive dividend or captures a popular buzz has been bid up to a high price.
  2. Unpopular. Anything that depends upon economic growth and improving prices has been out of favor.

Your Playbook

Whenever there are extremes it represents an exceptional opportunity for the insightful investor. You may never find a better time to buy cheap stocks (on a P/E basis) in cyclicals, energy, materials, technology, and financials.

The new market highs are a bullish sign. The market may move higher, as the astute Eddy Elfenbein is suggesting in this CNBC segment. (In 2010 I predicted Dow 20K rather than Dow 5000, a popular theme at the moment. Eddy suggests that it could happen this year). The anchor acts like Eddy is crazy. It is only an 11% gain from here. CNBC regularly features people calling for market declines of 40-50%. This segment has some good stock ideas as well, including Goldman Sachs, IBM, JP Morgan, and Microsoft.

The media world has turned into a silly competition to present the direst prediction. Some forecasters are determined, for whatever their motives, to scare you witless (TM OldProf euphemism). Those who are bullish are scorned for suggesting that the new highs might lead to another 10% or so. In fact, if you pick the right stocks, the gain could be much greater. I find a lot of stocks that are 25% or more undervalued.

If you do your homework, it is pretty easy to construct a portfolio with a P/E that is significantly lower than the overall market – even sticking to large or mid-cap stocks that anyone might want to own. Apple is an obvious example. Ford? Best earnings ever and the best-selling vehicle. P/E under 7 and dividend yield almost 5%. That is an excellent example of the intense skepticism of this market.

Conclusion

There is definitely a bubble, but not where most think. Look at any stocks in the “quest for yield.”

Even if you do not expect big gains from the overall market, there are plenty of sectors ready for an explosion. It is a great time to invest in stocks, or to improve your asset allocation. You have a lot at stake.

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