How To Deal with Today’s US Stock Market Risk – Ignore It

Friday, January 8, 2010

853695_monkeysI continue to hear a litany of warnings about the US’s inability to grow or even function. Common fears are the massive deficit’s effects, runaway inflation, a second economic/market drop and perpetually high unemployment. Added to the mix are threats from global warming, a burgeoning world population and terrorism. Finally, there is the Mayan calendar and the fear that the government knows something horrific and is conspiring to hide it from us.

My advice? Ignore it all.

But, can we really just ignore the risks being discussed?

The short answer is, “Yes!” Although not immaterial, these concerns should be dismissed figuratively (and emotionally) at this time. In normal times, such risks are rightly low probability considerations. Now, because of what we’ve been through and the continued fear mongering, those risks are overblown.

Let’s consider the risks I mentioned above.

First off, absolutely ignore the Mayan calendar and government conspiracy fears. They are groundless scare scenarios. Useful for movies; useless for investing.

The other concerns are real risks, but they should neither prevent you from being optimistic about the future nor deter you from investing for the long run. US history is filled with major problems that had to be contended with. In the end, life moved on and growth occurred, even as the adversity was dealt with.

Most importantly! The thought of risk is everywhere and is on all investors’ minds. Therefore, we don’t have to fret. We can, in complete confidence, know that no hiccup will be missed with so many investors’ eyes keeping watch. Therefore, we can focus on the opportunities.

Why not wait until others join in and risk drops back to its usual place? Because prices will have risen by then. Investing opportunities occur when investors are over-worried. And now is one of those times. I hear so many stories of abnormally large cash holdings, hedged holdings and alternative (i.e., non-US stock) securities. “Conservative” investment managers are defending their anemic 2009 returns by trotting out visions of the next investment Armageddon.

Forget it! It’s simply defensive posturing from having been frightened out of the market. These managers need another drop to rebuild their dismal returns and give them the chance to buy at prices they’ve already missed. It’s simply not going to happen. This game has been played after every major market drop, and the outcome in each of those was such managers either threw in the towel or went out of business.

That is why I like the idea of investors focusing on a few individual companies and stocks, like some of those in the Dow Jones Industrial Average. Even if you use a fund manager to select securities, the exercise is valuable. You will gain great confidence in owning US stocks by looking at the likes of WalMart, Procter & Gamble, Johnson & Johnson and 3M. Strong finances, good earnings, nice dividend yields and expectations of growth.

Personal note:

I don’t mean for this to be a simple “rah-rah” cheer for US stocks. Rather, it’s my strong belief built on experience and research. In 1970, when I had just entered the investment business, times were glum in the stock market. Shortly before US stocks took off, I heard many reasons why the US economy would be mired down for some time and US stocks were a lousy investment. That scenario has repeated itself many times since then.

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John Tobey on Seeking Alpha

Seeking Alpha Certified

January 2010