Buying Stocks: Don’t Succumb to The Siren Song of the Naysayers

by Alexander Green, Chief Investment Strategist
Wednesday, August 11, 2010: Issue #1321

Comedian Dennis Miller used to joke that he was at the airport when his ship came in.

A year from now, plenty of investors are likely to feel the same way. Why?

Because they’re ignoring the good news out there right now and not buying stocks. Instead they’re succumbing to the siren song of the naysayers.

And while no one can know for certain what the stock market will do in the year ahead, there are good reasons to believe that stocks may be substantially higher.

That’s because there are two traditional indicators that investors are wise to heed:

  • Don’t fight the Fed
  • Don’t fight the tape

Let’s take a closer look at each of these and I’ll show you why…

Don’t Battle with Bernanke

As we all know, the Federal Reserve has taken short-term interest rates to near zero. Moreover, Fed Chairman Bernanke has repeatedly said that he expects to keep them there “for an extended period.”

This is a green light for Fed-watchers. Low interest rates…

  • Make it cheaper for corporations to borrow.
  • Reduce the cost of owning stocks on margin.
  • Make cash and time deposits unattractive relative to stocks.

A stock investor today certainly isn’t fighting the Fed.

Let’s take a closer look at the “don’t fight the tape” part…

Don’t Fight the Tape

The stock market is in a confirmed uptrend. Seventeen months ago, the Dow bottomed near 6,500. It has had its ups and down this year, but the big trend is up, not down.

  • If you’re buying stocks, you’re with the tape.
  • If you’re short the market or out of stocks, you’re fighting the tape. And that’s not good.

(The tape, of course, is a reference to the ticker tape of yore.)

Some investors tell me they’re not comfortable buying stocks during a recession.

Hello?

It’s true we’re not experiencing robust economic growth. But a recession is defined as two consecutive quarters of negative economic growth. We haven’t had a single negative quarter in the past year. In fact, GDP growth has averaged 2.84% a quarter over the past 12 months.

It doesn’t feel that way, of course, because housing is in a funk, unemployment is high and consumers are reluctant to spend. But for the third consecutive quarter, profits have mostly beaten expectations.

Why? Partly because companies have laid off unnecessary personnel, refinanced debt at lower levels and cut other costs. Even a modest uptick in revenue is causing a big jump in bottom-line profits.

Plus, businesses are benefiting from technological innovation, negligible inflation and booming new markets overseas, particularly in Asia and Latin America.

Feel the Fear… And Buy Stocks Anyway

Other investors tell me they can’t buy stocks because there is just so much gloom and doom out there.

Apparently, they don’t realize that negative sentiment is a powerful contrary indicator. (Or as Warren Buffett often says, you want to be fearful when other investors are greedy and greedy when others are fearful. And without a doubt, investors are fearful right now.)

Of course, there is a lot of negativity because this is an election year, too. Republicans are talking up how bad things are to increase their chances in November. Democrats are conceding that things are bad – and still blaming things on Bush – because they don’t want to seem out of touch.

Indeed, there is plenty to dislike about how the folks in Washington are running the show. But a decision to buy stocks is not an endorsement of any political party or a statement that all is right with the world. It’s merely an acknowledgement that business conditions – and profits – are likely to improve in the future.

If you disagree, that’s fine. But at least concede that you’re fighting the Fed, fighting the tape – and fighting the sentiment indicator.

Historically, that has not been a profitable strategy.

Good investing,

Alexander Green