Wednesday, June 14, 2006

Reinforcement of pessimism - the coming market decline

The Nattering Naybob Chronicles summed up this MSN Money article by highlighting many of the same key points I would have. There's one more:

My economic and investment models continue to forecast the potential for one last hurrah in stock prices this month before a precipitous decline in July through October. That'’s potential, not a guarantee. But it' ’s enough of a potential to worry about.
This would be the best time to reevaluate your current positions and to tune your retirement accounts, especially if the downturn this past month made you nervous. I'm fairly confident that there will be a bigger downturn of 10% or more starting as early as mid-summer, and it could take over a year to recoup, but I don't think that the downturn will be long enough to justify a wholesale changeover to bonds and fixed income investments. I do however think that Small- and Mid-Cap stocks are going to be hit fairly hard, so consider migrating your portfolio over to Large-Caps, which provide a less exciting ride during a Bull market, but are more reliable during a Bear.

Lastly I'd like to highlight a quote that contradicts my beliefs:
I think it is usually very important not to get too weighed down with what can go wrong in the market. If you're a smart person, you have a critical mind and can nitpick all kinds of problems with the world. You can see that the dollar is falling, energy prices are soaring, home prices are stalling, the U.S. budget deficit is out of control, the administration and Congress are flailing and inflation is on the advance. And you can conclude from all of these concerns that the market should fail.

As investors, we don't really care about all of these facts except as they pertain to individuals' appetite to buy stocks. All of these terrible things can occur, and yet investors can remain buoyant and drive the market higher. It's called "climbing the wall of worry," and it is a very important part of a strong bull market.

That first paragraph makes a lot of sense to me. The second, however, clearly differentiates the writer from a value investor. Folks like me don't buy and sell on the sentiment of other investors, they're just too hard to predict and their behavior tends to take dramatic swings in a unified stampede. Maybe I'm risk-averse, or maybe I'm just an "investor" and not a "trader", but I personally only feel comfortable buying underappreciated stocks with strong fundamentals.

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