When it comes to investing, does the title “Party Time…. Let’s Celebrate!” sound counter intuitive right now? This title is the most opposite/contrarian and therefore it is likely the most appropriate title we could think of at this time. Why?
Valuable stocks and investments are on sale! Note that we did not say all stocks are on sale but “valuable” stocks and investments are on sale. In fact they are available for potentially ‘fire sale,’ ‘everything must go,’ rare ‘clearance’ kind of sale prices. Who’s getting out of the stock business by clearing out their inventory of stocks? We think it is the leveraged public and institutions. Who is buying these stocks? Answer, the same elite “rich” who keep getting richer as they pursue the opportunities created by the panic selling.
It is times like these that an investors self proclaimed, contrarian principles are truly tested. It is when everyone is panicking, selling and running for the hills that it is hard to buy in true contrarian style. We believe this is why only a few brave investors are able to make fortunes in these markets.
The following chart illustrates what we believe is the emotional response of the average investor to a rising investment.
The next chart illustrates how a profitable investor likely views a rising stock price.
The key difference in the two examples of an investor’s response to a price rise is:
The Effective investor gets nervous as the price rises and interested when
the price drops while conversely the poor investor gets interested as the price
rises and nervous when the price drops.
Maybe it is time to party because prices and public sentiment has fallen a lot. Perhaps it is time to cautiously deploy new capital into the financial markets; but where?
During times like these we focus on the following:
- We believe markets are cyclical and not linear. Overall most stocks will not go to zero and high value stocks will likely rise again.
- We also believe that when extreme panic and fear are prevalent in the general public, it may make sense to cautiously take new positions in investments that have good value.
- What is good value? In the long term, what investments are undervalued relative to other investments? What asset classes are experiencing a major bull market pull back and what asset classes are experiencing a major bear market crash?
The bottom line is that we believe commodities are in a major bull market as funds flow away from investments people “want” and into assets people “need” such as commodities like silver and gold.
We believe that commodities and in particular silver and gold are undervalued relative to paper assets. Stocks were in a bull market for twenty years from 1980 to 2000. The Dow Jones climbed roughly 13 fold as it marched higher year after year. Since 2000 it has struggled as it trades sideways and capital flows out of stocks and into commodities such as silver and gold. Commodities were in a bear market for 20 years until roughly 2000 when they started a new mega bull trend. But bull markets typically don’t end in eight years and they don’t usually end with public mass skepticism or with only a 4 fold increase. If we compare the bull market in gold and silver to the 1970’s bull market and the 2000 bull market in the Dow Jones, we can see that there is likely much further to run both in terms of time and appreciation.
Also, commodities such as silver and gold currently have high demand and are reported to be in tight supplies. Physical silver and gold products are currently selling at significant premiums as retail precious metals products are difficult to find. When credit markets are imploding and major companies are going bankrupt, tangible assets such as precious metals may be viewed as a safer alternative for preserving wealth. In addition, our Custom built Long Term Timing Charts show us that capital has been flowing out of other asset classes and into precious metals.
When this pessimism passes and stocks once again head higher, we think precious metals related investments will do better than yesterday’s favorites such as technology and financials etc. Currently, we believe that all signs point to a bull market pull back in precious metals creating an opportunity for a long term investor. To be clear we are not suggesting that all stocks are created equal and all investments will climb after this pessimism passes. We are also not suggesting investors throw caution to the wind and jump into the market with both feet. It may be likely that lower prices across the board are still ahead of us. The world may also be headed directly into extreme economic pain and hard times. Caution is strongly warranted. However, given the above comments, we believe it may make sense to use a contrarian investment strategy and deploy new capital into high value investments while everyone else is panicking. After all, many high value investments are on sale… Wooo Hooo!
At (www.investmentscore.com) we use big picture, custom built timing charts to help guide us in our investment decisions. If you would like to learn more about our investment strategy and sign up for our free newsletter, you may do so at www.investmentscore.com.
October 31, 2008
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