Should you buy stocks now? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 3 June 2010
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Baltimore, Maryland

Well, they don't make it easy for you.

Yesterday, the Dow rose 225 points. Enough to keep people guessing. Enough to keep people in the market. Enough to give the 'recovery' spotters something to look at and investors something to hope for.

But is the market really headed down...or not?

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We've posed the question many times ourselves. Our answer is always the same: "it's probably best to think it is going down, even if it isn't."

Why?

Because most stocks have still not hit their ultimate lows. If you can't see the bear market's final lows in your rear view mirror, they must be ahead of you.

When you buy stocks that aren't cheap you're completely at the market's mercy. If it goes up, you do all right. If it goes down, you lose money.

Since we don't know what direction the market is going, we'll just wait until stocks are cheap. Then, we won't have to worry about which direction the market takes.

Besides, if we don't know which direction the market is going, we have to assume that there are even odds it will go down or up. Even odds aren't good enough for us. We don't want a level playing field. We want a playing field tipped in our direction. We don't want an honest card game; we want a deck we stacked ourselves.

Which would you prefer, dear reader: to make a dollar...or not lose one? If the odds are even, it assumes one is as a good as the other. But they're not. If you hold onto a dollar, you keep 100% of it. If you make a dollar, on the other hand, you pay taxes on it. After tax, it could end up being worth only 50 cents. That means you'd have to believe a bull market was twice as likely as a bear market before you should invest.

Do you think that? We don't. We think this market is more likely to go down than up. By our reckoning, the bear market began in January 2000. The feds fought it with every weapon in their arsenal. Monetary policy. Fiscal policy. Booby traps. Scorched earth. Everything. And the market responded...for a while. Greenspan's 'emergency' low interest rates caused a huge bubble. Stocks rebounded.

And then the bubble blew.

The Dow fell below 7,000 in March 2009. This time, the feds brought out another, even more powerful weapon. They blasted away with "quantitative easing" adding $1.2 trillion directly to Fed's reserves. And once again, the market bounced....until about a year later, when the quantitative easing program ran out of ammunition.

You can fight a downturn. You can hold off a bear market for a while. You can distort a correction making it much more twisted and nasty. But you can't stop it. One way or another, mistakes will have to be reckoned with. Markets will eventually discover what things are really worth. And in a real downturn, they'll always discover that they are worth less than people thought.

History shows that after a peak is reached, stock prices will keep falling until they become bargains again. Why stop there? Because that's just the way it works. Trees don't grow to the sky. Neither do they stop growing altogether.

So, if you knew that a stock would eventually sell for less, why buy now? Why not wait? What's the hurry?

The reason given for yesterday's big bounce was a pleasant report from the housing market. More houses are being sold, said the news.

Does that get you excited, dear reader? It doesn't do anything for us.

Another report tells us that inventories of unsold houses are still building up.

Meanwhile, the New York Times reports that there is a crisis brewing in student loans. We didn't have to read the article. Students get out of school. They can't find a job. How do you expect them to pay back their loans?

A report in the local paper tells us that more students than ever are enrolling in community college.

Overall, the economic reports are broadly encouraging...but still consistent with our Great Correction hypothesis. This is NOT a normal recovery. Nor is it the end of the world.

We'll wait 'til the end of the world comes; then, we'll buy stocks.

*** Recently, we spotted a line of talk so idiotic we thought of Thomas L. Friedman. Pundits are calling on the US government to take charge of Deepwater Horizon disaster. No kidding. They think the feds should take charge and get the job done.

Let's see, what do federal officials know about drilling for oil? Which bureaucrats could handle a serious blow-out a mile under the water? The ones who run the Post Office? Amtrak? The US Congress?

We're sure the federal government has some intelligent and earnest people working for it. But when it comes to deepwater oil drilling operations, we have a lot more faith in BP to get the job done.

But didn't BP already make a mess of it? Well, yes. But when we saw what these operations try to do, we're amazed that any of them works.

*** "I don't know what I'm going to do. I'm almost 28 years old. I've spent 7 years in college. And I'm not trained for anything. I'm not married. I don't have a job. And soon, I'll be 30 years old."

Sophia was telling us about her career. Her job didn't work out. She isn't sure she wants to continue with physical therapy and massage. She isn't sure she wants to stay in Baltimore. She isn't sure she wants to get together with [a young man she knows]. She isn't sure he wants to either.

"Sophia," we gave her our standard line. "There are only 3 important decisions you need to make in your life. What you do. Whom you do it with. And where you do it. Everything else takes care of itself."

"Yes, but nothing is taking care of itself. And I don't have any answers to any of those questions."

Sometimes we wish we were 25 years old again. Other times, we don't think we could face it. Too many things to figure out.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer:
The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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4 Responses to "Should you buy stocks now?"

ak

Jun 4, 2010

For last 10 years, Mr bonner has been predicting gloom and doom and he has been right twice - in 2000 and 2008-2009. Any analyst can be right 20% of the time. Analysts expecting market to rise have been right 80% of the time.

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VB

Jun 3, 2010

I would like to know what is the level of S&P 500 is Mr Bonner dreaming of ...back to March 2009 - 660 levels or lower. I dont think Mr Bonner is over pessimistic,if US markets are going to fall then all emerging markets will get thrashed. I know it is not easy but atleast he can take a call on the projected level of S&P 500. He is not alone in painting a gloomy picture of the US and Europe there are many experts talking of a terrible crisis ahead of us. I tend to agree with his and their views. This DEBT CRISIS is not finished yet, and Indian markets cannot escape the worldwide mess so easily.

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jacob cherian

Jun 3, 2010

I think that Bill Bonner's pessimistic articles have no place in the context of the regular stock Buy/hold etc recommendations of Equitymaster because they are contrardicting each other. Mr. Bonner may well be right about US markets but his articles have no place in an Indian context. Those who follow his advice and sell all stocks might well regret what might well turn out to be an Indian decade!

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ak

Jun 3, 2010

will you suggest when to buy stocks?
did you recommend buying stocks in march 2009 when stock market was at historical lows? I dont think so!!

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