Is is too risky to enter the market?

Hi all, This is one of the news letter I subscribe to and it recently released a letter to all about a pertinent question that keeps coming up. I think this is a great article to share plus maybe give us all a little bit of fair headed perspective as to the current turmoil.. Is it still too risky to enter the market? “Lance, you are a big advocate of buying stocks now, even though it seems things are just getting worse, why?” A good question, that’s been asked in different ways, but the question remains the same, “Why am I talking people into investing now?” Here are my reasons. All recessions end, and this one will as well, but about 6 to 9 months before they do, the stock market moves up in anticipation. It happens every time. The matter is when this recession will end. The optimists, think late 2009, the pessimists think it may extend into 2010, making this the longest recession since the Great Depression. The reality lies somewhere in between. Let’s expect an end in the first quarter 2010, which is on the “gloomy side”. If that were the case, then stocks, based on history, could start moving up as early as June or as late as September 2009. So, this means you realistically will be able to buy stocks at around these prices for at least the months of March, April and May, maybe a little longer, After that, the stock market may move higher in anticipation of an end to the recession. Next, the various stimulus packages could have an effect in coming months and may increase the earnings outlook of various companies involved in the construction and infrastructure industries (which we are targeting among others). Based on history, and the Chinese experience, it takes 3 to 6 months before you start seeing some economic movement (a little sooner if it includes cash bonuses or tax cuts, as it does in Australia and the US). Again, this puts us seeing some “stimulus traction” in say, 3 to 6 months in around May to September. If that’s the case, the stock market will react in that time period, it always does. While we are still hearing about unemployment getting worse, and that the financial system is blocked up with bad loans and banks in the US still need more money, the market will sit exactly where it is, right? That’s true, however a survey just released (late February) from workforce consulting firm, Watson Wyatt Worldwide in the US concluded that more companies are resorting to pay and hiring freezes, rather than payroll reductions, to weather the recession. More than half, or 52% of the 245 companies surveyed, said they\'ve already made job cuts. Job cuts were still being planned by 13% of respondents, but that’s down from 23% in December 2008. While all these surveys have a margin of error, it does show a trend that maybe the worst of the job losses may be over, or at worst, stabilised. Of course, there’s always an increase in risk to employment in regard to unexpected bankruptcies of companies, but at least there are signs of the trend bottoming. Companies like Caterpillar in the US are already talking of re-hiring sacked staff. As far as the US banking woes go, the Obama administration has implemented a system of stress testing of banks which will gauge the banks ability to safely operate in much worse conditions than they are currently facing. It will then let the government know which banks could be in trouble and what they need to do to fix their capital situation. This will conclude for all banks in the US by April. Now, once this is done, we will hear some good news and some bad news up until late April as regards the banks. After that, we’ll have a great deal of clarity as to what banks are good, and which ones are in strife. The market will react and buy up good banks and sell down banks that fail the “stress test”. The market overall will move strongly up on the basis of “now knowing”. The market does not like uncertainty. Once they have certainty, we may see a rally set off by US financials in late April or early May. By then Obama’s Housing Bailout Program should be arresting the foreclosure problem as it will have been in place for at least a month. This will start to add confidence to the average people on the street and give consumers just a little confidence to open their wallets. This should occur by May. Also, by May, we should have heard all the worst on the unemployment front, if we haven’t already. By this stage, the banks will have already passed their stress tests and have all the capital they need to start lending again, which will also help stressed homeowners renegotiate mortgages, the thing that started all this in 2006/7. So, to sum all this up, we may see the start of a stock market recovery as late as July 2009 or as early as April 2009. This gives you the opportunity to buy stocks at around these prices for at least another 2 months or possibly 5 months. Now, I could be wrong and the rally could start next week, or could start as late as August, but remember, when news is at it’s darkest and worst, that is the time to act. Yes, it’s also a time when you take the biggest risks, but reward, never comes without some risk. Consider this. Many stocks are down by around 55% from their highs in October 2007. In those days, many stocks had PE ratios of 15 to 20+, now they are much lower, around 6 to 10 and that’s after factoring in recent drops in earnings, which as you know always recover after a recession (for good companies anyway). Do you think these good companies (forget the bad ones, we don’t want invest in those) will ever get back to their former valuations of a PE of 15 to 20 with growing earnings and a new all time high for their share price (I’m only talking about the good companies here)? Of course you do, but it’s the time frame that’s the problem right? Well, let’s have a reality check and you’ll see why I’m always going on about buying stocks. Just say a company’s share price has fallen 55%, it will take a rise of 122% to get it back to it’s high, correct? If you bought it now, and it reached a new all time high in a year you’d make 122% on your money. But what if it took 2 years? You’d make 61%pa on your original purchase price. What if it took until 2012, 3 years from now? You’d pick up 41% each year. Amazingly good returns in anyone’s language. Even if you asked the question, “But what if it took until 2019, ten years away, to get back to a new high?” I would respond by saying, it doesn’t happen if you pick the right stock, but then you would have earned over 12%pa on your original investment. See my point, the rewards are there waiting. This opportunity, may not happen again in your life. The trouble is people can’t see past the current situation. They become “myopic”, they only see what’s right in front of them, not a little farther out. They are overcome with fear, and that’s what stops them doing anything in times like this, and it’s also the reason they will never do really well out of investing in stocks. Billionaires like Buffet and Soros are aggressively buying right now, will it be another case of looking back in years to comes and wondering, “What if……” Until Next time, Lance Spicer Editor, Trident Confidential 27 February 2009 PS. Yes, I\'m investing right now, and if I hadn\'t invested when others said not to, I would not have made 23% in 2008 and I wouldn\'t be up 27% so far in 2009. Today, an Australian Trident Confidential stock that I know is widely held by many members, is up 40%, just today. It\'s up a total of 160% in less than 3 weeks.... that\'s why I advocate stocks all the time - I make money out of them, yes even in the \"worst market since the depression\".

This is a good time to buy, assuming you have sufficient funds to tide over recession, adopt along-term horizon AND pick good companies. It\'s simple, but not easy !

Hi Musicwhiz, Easier said than done and you need guts and a loooooog time horizon. Plus it is not simple and not easy...to pick the right companies..

Risk is in fact reduced, not increased, when share prices go down. This is because your margin of safety is increased too assuming you have evaluated the company well and adopt a long-term horizon. Companies without economic moats and sustainable competitive advantages are prone to reduced margins and slumping sales or market share after some time. This is due to the principle of capitalism where \"the best company wins\". So it\'s sort of like a free for all. This means there are actually very few good world-class companies to invest in where the Management can allocate capital rationally and efficiently for a long period of time.

What a coincidence.... Interesting that you posted almost exactly the same time as my other reply to you about business moats..huh!!

Risk has been furthered reduced as prices go lower and lower. This is because margin of safety increases and propensity for an error of great magnitude to occur also decreases. Somehow the mainstream news always gets it the other way around by saying the risk of the downside is much higher than the upside ! I wonder why this is so ?