Thursday, February 01, 2007
January 2000
January 2000
We all know what that time period was. The most recent crash yet, this time it was the falling tech sector. Much like the 1929 crash that ultimately caused the great depression, this crash was because of an over hyped market with little “true value.” The market had no sense of what a security should be worth, just what it could be worth.
With these values in mind, it is impossible to think that any investment in the market was a good one.
Now there is a new study out that says anytime a majority of newsletter, magazine or newspaper magazines see a rising market, that usually indicates a future fallout. How can we not say articles are for the most art in favor of the markets after titles like “New record” “Dow tops 12000” “Best year of the decade!”
In 2006, the S&P500 returned a whopping 14%. This was one of the best years for the markets as a whole. Many companies were sold or purchased by domestic and foreign money. 2006 was the best year for any value investors due to lower and lower PE ratios.
These scenarios are especially true with the recent real estate boom in the United States. Just as the market started falling out, book upon book upon book was coming out and more people appeared on TV promising to teach the average person how to become a real estate millionaire.
Getting cash back at closing and using it as a down payment on yet another home became all the rage in most of the United States. Now we’re oversaturated with houses and as rates fell, more people could afford bigger house. At higher rates though, the market is almost stagnant, winter probably didn’t help this situation either.
The facts are there and will always be there. Risk can not be avoided if any gain is expected. When we mix this risk with our own human psyche we tend to psych ourselves out. Our emotions are the worst thing to let out of control, besides politicians of course! Gains or losses on the markets can be huge emotional gains or losses. We tend to act differently as when we are calmed and relaxed. When I am amped up and trading I know for a fact I act differently, I’ll reconsider all of my trades and have some suicidal financal thoughts. Take profits and stop losses can help prevent your inner self from taking the wheel but none of it is 100%.
Dollar cost averaging also takes the guessing work out of investing. When we average our investments into the market over time, it can benefit us if our positions lose in the short term. Losses can be turned into profits because of decreased share prices. With dollar cost averaging I can buy into stocks at their worst and best and still profit from both. This takes away some potential profits but also some risk.
Time for the hard numbers:
In January 2000, 56% of investment articles were bullish. This was right before stocks crashed. Today, 60% of newsletter writers see stocks rising.
Obviously this data is not a 100% prediction. There is no way to truly predict 100% what direction the market will move, these numbers are merely for consideration and pondering.
Looking at the past 5 years, the markets have been doing rather well. This would complete the cycle that has existed since the beginning of financial markets. 4-5 good years then one poor year, rinse and repeat. Just something to think about.