Sunday, November 16, 2008

U.S. Stock Market: This Is a Buying Opportunity

Judging by the tone of the media, it seems that by this time next year, about half of us will be unemployed. If any of us can afford to travel, it will be only by horse and buggy, since our car companies have gone bankrupt. We will also be driving without insurance, as our insurance companies have gone bankrupt. Looting/chaos will run rampant, as at that time we carry our valuables and cash on our person, as none of us have homes and since all of our banks have gone bankrupt.

This is obviously an exaggeration, but by watching the news for a few hours a day, it’s hard not to expect that doomsday is coming.

Anyways, I just got a coupon in the mail yesterday from JcPenney’s for 40% off any clearance items (which are already marked down 50%). I am not quite sure, but I think they may be paying me to take their clothes. This is a bargain hunter’s dream. However, most people aren’t bargain hunters with investing. When we get nervous about the markets and the economy, many people panic and sell their whole portfolio. On the other side, when we see our statements having monthly double-digit returns, we consider selling our house, family heirlooms, and wives/progeny to invest in the stock market. Our investing mentality is completely counter-intuitive.

The loss of confidence in the world-wide stock market/economy has had dire consequences. From its Oct. 2007 high to its Oct. 2008 low, the Dow has fallen 54%.
I found a few other examples of multi-year lows within the past 40 years:
· From its Oct. 1973 high, the Dow fell 43% to its Oct. 1974 low
· From its Feb. 1977 high, the Dow fell 23% to its Feb. 1978 low
· From its Sept. 2001 high, the Dow fell 28% to its Sept. 2002 low

The average gain from these 3 multi-year lows to their next year’s same month high was 32%.
History tells us a few things. 1) The snowball effect from herd buying makes stock markets increase more than it should 2) The snowball effect from herd selling makes the market drop further than it should, and 3) the worst time to take your money out and give up is at a multi-year low, which is where we stand today.

Over the past few weeks, the market is sending bargain hunters coupons in the mail for bigger and bigger discounts.

Aaron Konen

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