Groundhog Day – A Reminder To Ignore Shadows

Tuesday, February 2, 2010

No, I am not advising we ignore Punxsutawney Phil. Rather, we need to disregard shadows of things past in deciding what to do next. Nothing is quite so powerful as recent bad times for dampening investors’ enthusiasm and keeping them away from sound, long-term investments. The shadows (memories and feelings) are too fresh.

So, what’s a shadow antidote? Here are some that work well:

Ignore “big picture” reports that regurgitate how bad things have been, then extrapolate to a dismal future. Many continue to appear, trying to scare investors with terrible visions of negative forces beyond our control leading inexorably to disasters ahead. Remember, it is easier to frighten people than to reassure them – particularly when their lives or money are at stake. In the media business, negative reporting is a rewarding business strategy. So, ignore the reports. Being a cynic at this time is acceptable and helpful.

Remember that the recent problems were abnormal. We haven’t gone through the looking glass into Alice’s wonderland. Rather, we have just experienced one of those bad times that flush out excesses and put get-rich schemes to pasture and charlatans into jail.  There is a natural order of things economic and investment, and we are returning to normality. And normality is the perspective needed to make the best investment decisions now.

Be a contrarian. The best time to buy is when you hear the words “stock market,” and you want to throw up. It seems we are beyond the gag-reflex stage, but interest in US stocks is still lagging. Many see too-high risk in the likes of Walmart, yet happily buy high-risk junk bonds, third world debt and leveraged commodity investments. Interestingly, being a contrarian now means adopting a rewarding, mainstream investment approach.

Look to the future. Remember that bull markets haven’t been cancelled. There will be a time when there are no shadows, and investors will be watching their portfolios climb daily (or hourly). Naysayers will have been given the heave-ho, and investors will be following a new crop of get-rich advisers. Then, we will need to look for shadows to come.

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John Tobey on Seeking Alpha

Seeking Alpha Certified

February 2010