umarsaeed

Investment Advice

In Advice, Financial on September 8, 2009 at 8:27 PM
I just found THE best investment advice article. It’s not written in a prophetic way, it’s just stating some observations, but personally I find facts more useful than predictions when it comes to investments. The author, Jason Zweig, touches broadly on the economy as a whole, market history, and for me, no investment advice column would be complete without some psychological bias that investors commonly fall victim to.

He mentions the rapid recovery in global markets. The biggest reason for recovery in stock market value might just be the result of that gigantic global stimulus we deployed earlier this year. We’ve injected our economic system with a ton of money; despite the fact we just established there are a lot of holes in our financial systems. Under the guidance of a widely accepted mantra of “more money be good,” we’ve been able to get people spending and keep companies producing, which is making all the numbers read like a recovery is looming.

When he talks about a V-shaped recession versus a W-shaped, it’s simply economists trying to picture what the GDP production graph will look like years from now, when we’re out of this mess and we can analyze what happened more accurately. The GDP graph of a nation should reflect the same ups and downs as a market graph, except the stock markets anticipate information whereas GDP is based on past data.

A V-shape would imply that we have already hit bottom, and we’ll soon get into higher production levels globally and be back to normal in about a year’s time. Although any proponent of the V will quickly point out that “normal” won’t be what we’re used to, we’re still looking at positive economic growth in some sustainable fashion. If you believe in that, you are probably buying stocks now. The worst his behind us, and regardless of what the line will look like, it’s going to go up.

Most economists who believe in the W are basically saying we’re going to go through the same thing twice. They, like me, believe that stimulus packages are currently propping up global demand. When those effects disappear from our economic system, we will experience another dip.

Now, no proponent of the W believes that the second dip will be as severe as the first, but take a look at what happened after Black Monday in 1987. Recovery appeared to be on its way after the crash, but behind the scenes the economy was falling apart. It took over two years for the recession to actually hit us. It hasn’t even been a year since the most recent crash.

Here’s what we did this time around: Once we realized we had an enormous problem, we threw a lot of money at it. Then someone said, “wait.” That’s where we are at. We’re waiting for the results. I’m not saying money can’t be made in this market; I’m saying it’s impossible to know the long term worth of stocks.

So what does it really mean when the stock market recovers the way it just did? One would think that the markets have reached a consensus that we are going to go through a V-shaped recession/recovery process. If the market was full of long term investors, I would agree that there is a general market sentiment that recovery is on the rise. This would still only be a market sentiment; a collective projection based on number crunching, best estimates and gut feel.

But the market isn’t made up of investors. It’s mostly speculators (individual day traders and their much more powerful institutional counterparts). So what is the general consensus of speculators worth to you? Do current market prices reflect anything other than the whimsical trading strategies of Wall Street banks and Hedge Funds trying to turn a profit?

The market recovery is being mistaken for an economic recovery, and that’s where I start to worry. Sure, some of the market appreciation we experienced was due; so many strong and stable companies had their stock price plummet because of the widespread panic during the crash. Rightfully so, those stocks went up. But what Zweig’s findings point out is nobody really knows at what point these stocks should stop rising, and there’s a chance we’ve gone too high.

“What stocks do you like?” I’ve been asked this question a lot lately, and I’m currently invested 100% in cash. I’ll be honest with you. Mostly, this reflects my aversion to risk. I also want to avoid situations where I have to constantly consult with the business ticker to determine my mood.

They say a house is the biggest purchase the average person makes in his or her life. I want to be one of those people. And if there’s money leftover, I’m letting it ride on the Toronto Raptors taking it all this year. I mean, at least they’ll let me cheer and scream from the sidelines.

You should really know who you are before investing in this market.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: