Tuesday, October 7, 2008

Bears are Smiling for Now

Even after the US government settled on its $700 billion bailout plan, markets continue to drop on Monday. Investors who sold out of the market before this latest drop are congratulating themselves. Unfortunately for them, they still need to make another right guess to come out ahead.

Because I don’t believe we’re headed for anarchy, I expect recent stock market losses to reverse sometime in the future. It may not be for months or years, but I expect the sun to shine again. If I’m right about this, then any bears who sold before recent price drops will have to guess when to jump back into stocks. I suspect that most of them will buy back in at a higher price than their selling price.

A curious thing about human nature is that many of those investors who end up paying more than their selling price to buy back in will be happy with themselves anyway. Even though they have lost on their market-timing gamble, these investors will cheerfully tell others about how they got out of stocks before the big fall.

In the same way that most people claim to have above-average driving skills and have made money on their lottery ticket purchases, most market timers will claim to have made money. They aren’t necessarily lying, though. Many of the investors who lose money through market timing will actually believe that they are ahead.

The cold, hard facts about the futility of market timing are no match for human illusions. In the same way that someone has to win the lottery, some people will come out ahead by selling all their stocks and re-buying them at the right time. Maybe you could be one of these people, but probably not.

3 comments:

  1. Picking the bottom is obviously impossible, however lately some of the sell offs have been so dramatic (like the one yesterday) that I believe long term investors should be buying selectively on days like this.

    You can only have so many of these 5-10% daily declines in the S&P before there is loads of good value out there. As long as long term investors just keep buying selectively when serious weakness enters, I believe that they will be rewarded longer term.

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  2. MG: I agree that steep declines offer a good opportunity to buy if you have any money on the sidelines. Unfortunately, to have money on the sidelines, it has to be sitting around attracting poor returns while you wait, unless you have the magic ability to predict future stock market prices.

    All that said, I'm scrounging around in my trading accounts for nickels to pile into stocks.

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  3. What's happening in the markets is just madness and driven by fear. Like you, I'm scrounging for nickels to invest in the markets these days.

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