Running with the Bulls

December 18, 2009 at 2:00 am Leave a comment

Guest Contributing Writer: Bruce Wimberly

No matter where you turn some “expert” is espousing his or her view on the direction of the market. The reality is none of them know. My advice to anyone is avoid the fallacy of experts. Those that purport to know, donʼt. It is a mere exercise in futility to justify charging higher fees. Letʼs be honest if anyone knew the future direction of asset prices they would be beyond rich (Iʼm talking John Paulson – Trade of the Century rich!). Nice job John who would have thought you could make that much money betting against mortgages.

As investors our best bet is to accept that fact that market timing is a losing strategy. Timing the market is similar to a coin flip. Pure and simple, the cost of getting it wrong wipes out the occasional gain of getting it right. Remember, every time you listen to the perma-bears and try to time the market, there is big time investment professional on the other side of that trade who is by definition taking the opposite view.

Good investors expand their timeframes. They do not get sucked into the news of the day. Let the perma-bears worry about Dubai, currency devaluation, or whatever else is todayʼs fear. Keep in mind there is always something to worry about. For long term investors the greatest fear is not being in the market. For example, if inflation were to average 3% and you are sitting in cash earning nothing your money will be cut in half by 2033. Grandmaʼs mattress is not an option for most people.

Now back to the question of bulls versus bears and the direction of the markets. Who is right? The simplest way to think about this comes from Oracle of Omaha himself, Warren Buffett. Buffett thinks of the market as a reflection of total market cap relative to US GNP (gross national product). After all, in the long run the market should approximate some measure of overall corporate profitability or in this case overall economic growth. If you accept Buffettʼs argument then the market is neither overly expensive or cheap. As of yesterday the total market index is at $11,296.2 billion which is about 79% of the last reported GDP. (I know the perma-bulls will find some reason to bash the reported GDP number). Nevertheless, this simple formula provides a good long term context on which to gage the relative attractiveness of the overall market. To put todayʼs number in context (79%) at the peak of the market bubble in 1999, the ratio of total market cap/GDP was 150% or almost double todayʼs reading. Yes, the market has made a major move from depressed levels earlier in the year but that is irrelevant. Donʼt anchor on that number or you will never get off the sidelines.

 My advice is simple, ignore the perma-bears and avoid market timing like the plague for it is a suckers bet (see also article on passive vs. active investing). If the market does pull back (and it will at some point) this is great news for the long term investor. Anytime you can buy a stock on sale – this is a good thing! So enjoy the Christmas holidays, donʼt believe the hyped up bears and as always:

Plan. Invest. Prosper. 

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients own certain exchange traded funds and equity securities in client and personal portfolios at the time of publishing, but had no direct position in BRKA/B. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC “Contact” page.

Entry filed under: Stocks, Themes - Trends. Tags: , , , , , .

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