The Public Has Moved Out Of Stocks.  Time For Wise Investors To Move In.

 

 

We are led to believe that stock prices are a reflection of business and economic news. This is false. Rather, the stock market is an expression of mass human behavior. This behavior rarely becomes as extreme as it is today. It is now sending a resounding buy signal.

 

Ten years ago when Warren Buffett stated in a famous Fortune Magazine article that stocks would perform poorly over the next ten years, prevailing economic and business news was quite positive.  Buffett noted that the public had extremely high expectations for stocks which had led them to over participate in the asset class, bidding stocks to unreasonable valuations.  Buffett backed his conviction by investing his personal fortune at that time in Treasury bonds. Today, we are at a point when the public is extremely pessimistic about the outlook for stocks, leading to very low public participation and the lowest valuations (when compared to bonds) in 60 years! It is in this environment of widespread fear that Buffett has re-committed his personal fortune to the stock market, after ten years on the sidelines.

 

Over the last two years the public has fled from stocks into bonds to an extraordinary degree ($600 billion into bonds versus nothing into stocks).  Furthermore, the public is sitting on $8 trillion in money markets and other short term parking places. This is the highest in history.  On top of that, corporations are sitting on $1.8 trillion in cash, since corporate leaders are just as fearful as the public.  This is particularly amazing since this cash is earning relatively nothing. We have reached a point now where public participation in the stock market is historically low, and public participation in the bond market is historically high. As soon as bonds begin to perform poorly (due to the inevitable increase in interest rates), the only choice for most people will be to invest in blue-chip stocks, which unlike bonds provide an opportunity for increasing income streams. For example, there were 535 dividend raises in the first half of 2010 – up 57% from the same period in 2009.  The ratio of dividend raises to dividend cuts was 9 to 1 in the first half of 2010. This is what corporate America is doing with some of its record high cash.

 

In summary, the stock market is not about news. The stock market is about mass human behavior.  Wise investors like Warren Buffett identify and react to extremes in this behavior. Many brilliant business people and economists don’t understand this fact. They therefore encourage the public to avoid stocks when opportunities are extraordinarily high, as they are today. We recommend you do what we are doing now, and buy the asset class for which public expectations are far too low – blue chip high dividend paying stocks.

 

 

 

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