Is It A Good Time To Invest?

– With the current situation in the financial markets we have seen stock prices drop significantly over the past 12 months.  Reaction & bailout measures by the Fed (US) in an attempt to instill investor confidence & calm the financial markets.  They claim they “got it right this time”, and will avoid such messes in the future.  As a result we’ve also seen the stock market surge incredibly in the last 3 days:
– Today the Dow Jones Industrial Avg (DJIA) gained 368.75 points or 3.35%.
– The NASDAQ gained 74.80 points or 3.40%, while the S&P 500 surged 48.57 points to 4.03%.
– In Europe the FTSE 100 closed up 431.30 points, the biggest one day gain at a whopping 8.84%.  The DAX was up 326.11 points to 5.56%.
– In Asia the Nikkei (N225) was up 431.56 points or 3.76%, while the HSI was up 1695.27 points or 9.61%.
– In Canada, the Toronto Stock Exchange (TSX) main index leaped to its largest gain in 21 years.  The S&P/TSX composite index closed up 848.4 points, which is the largest since the 1987 crash.

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Such major shifts in the market have now got people asking the popular question “the market looks stable again, is it a good time to invest now?”.

– Before I address the question, let me make some important comments on the statements made above.

– The truth is that the history most definitely repeats itself.  Another stock market crash will happen again, just like they happened many times before this one, if anyone actually remembers.  It pays (literally) to know some economic history.  Like many times before, hype & mania build up and the stock market rises to a point beyond reason.  People continue to pour more and more money into overpriced stocks, thinking it will last forever.  New financial instruments are created to exploit financial polices, and rules are loosened to become more flexible, time & time again.  The Federal Bank also adjusts rates to curb inflation and growing problems.  The problems continue to mount, and a crisis/crash follows.  Each time, the Fed says they need better regulation & rules, and create new policies.  However, its always too little, too late.  Usually, the solutions are at the expense of the average working middle class taxpayer, whether its explicitly obvious or not. Each time they believe and say that they’ve “got it right this time”.  They assure the public that it will never happen again, because they did something different that wasn’t done before.  Honestly, its the same type of thing repackaged a different way.  The instruments behind the crashes are usually different, but the reasons & attitudes are always the same,  Greed & Exploitation.

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– Still reading?  Good, we’re almost there.  Usually when the market crashes, people panic as their unrealized losses mount.  Note the word “unrealized”.  This means they see the market value of their holdings drop, if they were to sell.  That alone isn’t the problem though.  The main problem is they were probably buying stocks at ridiculous prices.  They were hoping it would continue to rise, with the intention of selling at the top.  We all know that works.   It doesn’t!
– People are adverse to buying when they see prices falling, fearing that the stock will go to zero.  In times like these, it is possible that a company goes bankrupt.  However, a high quality company with a solid balance sheet will not.  It is at such times when these stocks along with all others get sold off indiscriminately.
– When people see surges in the market like we saw the last few days, they want to buy in again, hoping to catch the rising wave.  They are afraid to miss the perceived opportunity.  They are always trying to catch the wave.  If you’ve ever been to a coastal ocean beach, you’ll know its impossible to catch a wave once it’s already past.  But this is what people are doing, constantly trying to catch the wave that has passed, and losing their life savings doing so.  They are never able to ride the waves.  People really need to change the way they look at the stock market & investments in general (whether it be real estate, etc).

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– Finally, I will now address the question.  It is always a good time to invest.  But it depends what you invest in, and the price you pay for it, not when.  You cannot time the exact market top or bottom.  You can only know that it will eventually happen and be ready both ways.
– When the market is crashing or low, there is more opportunities that can be found.  People are exiting and selling, leaving many high quality stocks beaten down along with the rest.  When the market is rising or high, there will probably be less opportunities.  People are jumping in left & right, buying without real reason and pushing prices way above their true value.  High quality stocks at low discounted prices will be harder to find.

– What you need to do is to learn and increase your financial knowledge, in order to be able to determine which stocks are high quality, financially solid, and what they are truly worth.  You also need to be disciplined & not be swayed by your emotions.  You will then be able to confidently buy investments when they are at a significant discount.  You won’t care what other people are doing, because you will have no doubts what you are doing.

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When you have the knowledge, discipline, and confidence that the majority lacks, its a totally different world.  Lets look at the same question again with this perspective.  I also have a delightful analogy that will help:
– Imagine stocks as fish.  High quality stocks are large fish, low quality ones are tiny ones.  The market is a river.  Investors are the fishermen.
– When the market is rising or high, the river is flowing fast.  The river is full of tiny fish, with very few large ones.   It is also crowded with impatient & crazed fishermen catching anything that moves.  Its a frantic scene, and needless to say it wouldn’t be much fun.
– When the market crashes or is low, all the fish are dumped in a large barrel of standing water.  The barrel contains more large fish than tiny ones.  Standing around the barrel are only a few patient hunters, easily choosing which fish they want to catch.  To make the situation more amusing, they are all armed with rifles.  In market situations like this you want to be fully prepared (knowledge, attitude, & resources).   This scene is much more amusing for the fishermen.

– So what are you going to do?  Read & learn, gain the necessary financial knowledge, attitude, & discipline.  It will be like shooting fish in a barrel!

– Don’t know where to start, read my 3 part article on How To Start Investing:
http://theinvestmentblog.net/2008/08/14/how_to_start_investing_part_i/

Let me know if you enjoyed this article, or if there is a question or topic you would like my to discuss in a future article.  Feel free to comment!

Thanks & Happy Investing!
The Investment Blogger

Author: The Investment Blogger

I’m a private investor, who developed the “function-centric investing” paradigm. I am an investor who blogs a little here and there, rather than a blogger who invests a little here and there. I'm passionate about investing and sharing investment knowledge!

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3 Comments

  1. Great article! Too bad I didn’t find your blog earlier. I am really kicking myself today. I should have did something when markets were low for so long. I would have made some good cash today! Keep writing more articles! Thanx!

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  2. Exactly, care must always be taken, and can go a long way in saving you from careless mistakes (which in investments will be costly).

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