Investing Update
Monday, July 22, 2002


    The stock market pundit Dr. Martin Zweig likes to say, "Don't fight the tape and don't fight the Fed." This is a little like a weather forecaster who, before issuing his daily forecast calling for clear, open weather, checks to see whether it's raining outside. But the idea is that if the bulls are running, run with them, and if the bears are mauling the market, stay out until they're through. This looks like a time when the bears are eating our lunch....  a time when "they also serve who only stand and wait". In my opinion, it's not yet time to buy. I bought shares of the Fidelity Select Technology Fund on Friday, and I'll hang on to them until they show a good profit and then sell, but I won't buy anything else until the stock market finishes collapsing..
    Today, the markets once again fell significantly. Here are some of tonight's commentaries about its meaning:.
Stocks See Fresh Lows, Fear Grips Street
Increasing buybacks signal market bottom
No Letup in Stocks' Punishment
    One strategy I've tried in the past has been selling in a falling market with the idea of buying back when the market starts back up. In practice, that's never worked for me. Typically, I'll be busy on the day when the market roars back to life, and by the time I can react, the stock market has already risen 6%to 8%.
    One of the problems with this market has been the "faux dawn bear traps" that have caught investors who thought they had seen the bottom, only to watch the rally fizzle out, and the stock market resume its slide. The safe thing to do is probably to wait until some of the indicators of a bottom show themselves, such as an increase in the ratio of up volume to down volume.
    On that day when the market turns around, the markets may fall sharply until later in the day, when they stabilize, and then are followed by institutional investors "bottom feeding" on the bargains that they perceive littering the floor of the bourse. However, given the market's downward momentum, I don't plan to invest until I see an upside stampede  I'll miss out on a few percent of the "upside potential", but that way I won't be as apt to be caught in a "bear trap".
    How far down could the averages go? The lower trend line on the Dow chart below shows a value below 2,000  for the year 2002. Ouch! 

    Similarly, the S&P 500 index bottoms at a little above 200 (not quite as bad).

    I certainly don't expect to see these indices drop to these levels. And the lower this market goes, the safer it becomes to invest in it.
    There is the matter of the stock market anticipating economic conditions six to nine months in the future. However, this isn't always accurate, leading one prominent economist to observe that the market had predicted "nine of the last four recessions". However, the above linked articles attribute this rout to an orgy of fear. Employees are seeing their retirement accounts drop by 3% to 4% a day. You can hardly blame them for opting out. They may be saying, "I'll cash in my funds, and then buy back in when the stock market is sincerely climbing again."
    In the past, during the bear markets of the 1970's and of 1982, a majority of small investors fled the stock market more or less permanently. A couple of decades later, in the nineties, a new generation of lambs were steered onto the scene. Now they've been sheared, and many of them probably won't return. I've been concerned about the fact that so many employees are investing for their retirement. But the underlying rate of growth of the entire U. S. stock market must be tied to the underlying per capita  rate of growth of the U. S. economy, and that isn't a double-digit growth rate. It's of the order of 2% to 3% in good times, and can go slightly negative during recessions. The stock market can soar 30% a year for a few years, but not for the 30 or 40 years it takes to build a retirement. Sooner or later, the market is going to have to return to earth, and when it does, it's going to take back what it gave. Long term, it can only rise at a low-single-digit rate, while paying dividends. In theory, companies can grow faster by retaining the earnings they would pay out in dividends. In practice, I'm not sure that that dividend money didn't go to pay for management's stock options.
    As Walter Wanger has said, dividends are real money that go from a corporation's coffers into your back account. Retained earnings are at the mercy of management.
    In theory, investors are the owners of the companies in which they invest. In practice, their ownership is so dilute and so uninvolved that (I suspect) management has a free rein. In principle, managers are hired by investors, as the owners of a company, to mange the company for the benefit of the investors and of the company. In practice, the managers report only to those major owners who take a serious interest in the company. And it wouldn't take some avaricious managers long to figure out that they would do better working for their own advantages than they would looking out for their absentee investors. I suspect that this is what has happened at places like Enron, where management has cannabalized the company to line their own individual pockets. ("Who cares what happens to Enron as long as we get ours.") And eventually, their investors ended up with a wallet full of air.