From Top to Bottom
August 9th, 2010By Jerry W. Atwood
PENSACOLA (July 2, 2010) (Supreme LLC Staff)
This article is being written at the very bottom (so far) of the 2010 stock market. The market can go lower, but it is doubtful it will because we are entering the time of the traditional summer rally. We may have less in our accounts, but we also have more bargain stocks to chose from.
If an investor is experienced and has been in the market for a while, all of this article will be familiar. If an investor just started in the market on April 26th, the top of the 2010 market (so far), then here is some information that we hope will be helpful in understanding what has happened to your stock account (what’s left of it).
The common stock market is in a cycle that no one can predict. On one extreme, some believe we are headed for another “great depression” which will be worse than the one of the 30’s. On the other extreme, some believe we are just pausing while the world economy begins to generate transactions which will make anyone who is willing to buy stock, wealthy beyond their dreams.
In a graphic form, here is what the top and the bottom look like:
| Market | Characteristics | How to Recognize | Action |
|---|---|---|---|
| Top | Stocks are selling at very high Price/Earnings ratios and Price/Book ratios. Business conditions are generally good. Lots of new highs everyday and very few new lows. |
Everyone is enthused about the stock market and it is the topic of conversation everywhere. The mailman and the bartender are giving out stock tips. | Sell |
| Bottom | Stocks are selling at very low Price/Earnings ratios and stock prices are at bargain prices but few investors want to buy and the public has no money. | Most people do not want to talk about stocks. There is fear about running short of income, losing a job, paying the rent and all things financial. |
Buy |
If we, as investors or traders, look at our portfolios after two months of turmoil and now six days of down markets we might be inclined to get out of the market or we might be considering that the stock market is just not for us. However, remember that Warren Buffet had the viewpoint, “Buy when others are fearful, and sell when others are greedy.” Maybe the most famous old saying is from Baron Rothschild who said, “Buy when the blood is running in the street”. This was also emphasized by Sir John Templeton, one of the most famous investors of all time.
It is time to find the bargains, but if an account is full of purchases of stocks that can only be sold at a large loss and has little cash, you have what is called a “frozen” account. All of your holdings are waiting for the market to come back up, but there is no cash to buy any of the bargains that are available from the downturn.
When you spot a bargain that you would like to take advantage of, try to find a position that you hold that is about the same value and sell it and then buy the new bargain. An investor is simply evaluating whether they would rather hold the new stock on the way up instead of the old stock that was sold at a loss. This method does not change the value of the account.
Here at the Journal of Common Stock we see a global economy where over six billion people have to be fed, clothed, housed, transported and financed. There is little possibility that the investors who provide these needs will not be rewarded. When we watch those who are selling stocks and not seeing the possibilities of the future economy we believe we are looking at the investors who love to be fully invested as the market is on the upturn and then want to sell out at the bottom. This, of course, is the opposite of what should be done.
Here is some advice from some of the greatest investors:
New opportunities appear from time to time. They should be examined and compared with what you already own. Gerald Loeb
Some people boast of selling at the top of the market and buying at the bottom–I don’t believe this can be done… Bernard Baruch
Basically, price fluctuations have only one significant meaning for the true investor. They provide him with with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. Benjamin Graham
However you view it, we are going to be in the summer upturn soon. Everything will be fine.
Just start selling before September.