In the realm of decision-making, there are actions so universally understood that they hardly require any explanation. These are the obvious choices, often clear to anyone with even a modicum of common sense. Engaging in such actions is generally ill-advised and should be avoided without hesitation.
For example, it’s unwise to provoke a Hells Angel biker by giving them the finger, nor should one challenge a semi-truck to a game of chicken. Most importantly, unless you want to face relentless scrutiny from the federal government, you should never stiff the IRS.
When it comes to investing in the stock market, the fundamental principle is clear: buy low and sell high. This adage is well known. Yet, many individuals frequently stray from this wisdom, often buying high and selling low. Their decisions are often clouded by emotions such as greed and fear.
In everyday transactions outside of financial markets, people usually make sound judgments about price versus value. We instinctively know when we’re getting a fair deal on a turkey sandwich or when we’re being overcharged. However, in the stock market, rising prices often distort rational thinking. The more a stock price climbs, the more demand it seems to generate, even when it may not be a wise investment.
Strategies for Buying and Selling Stocks
In today’s market, buyers flock to purchase Apple shares at $700 each as enthusiastically as they would line up for funnel cakes at a fair. In contrast, they may dismiss Microsoft, priced at just $31 per share. As for Apple, the question remains: is it still a good buy?
While it’s certainly possible for stocks to rise further after already climbing high, historical patterns suggest that every investment comes with risk. The timing to buy stocks often stands in opposition to the timing to sell them, and vice versa. The decision-making process may seem straightforward in hindsight when analyzing price charts, but the challenge lies in navigating these decisions in real-time.
Nonetheless, historical data can serve as a valuable reference point to assess current conditions and anticipate future trends. By exercising discipline and foresight, you might cultivate the ability to consistently buy low and sell high.
The reality remains that stock prices fluctuate, but they do not do so in a predictable manner. Stocks may rise for a time before retracting, or they may continue to climb. There are also occasions when prices fall further before they rise again.
Current Market Conditions and Potential Risks
Our focus here is the broader movements within the stock market. A recent look at the S&P 500 chart shows a remarkable lift of over 14 percent since it reached a low of 1,278 on June 1, and a rise of more than 21 percent over the past year. But why is this the case?
From our vantage point, the economy seems to be struggling rather than flourishing. There’s a lack of robust growth, with recent reports indicating manufacturing activity in the New York region at its lowest since April 2009. Additionally, we learned this week that FedEx’s profits have declined by 1.1 percent due to this manufacturing slowdown. This is unlikely to mitigate the negative jobs report from August.
However, it’s critical to distinguish between the stock market and the economy; they can drift apart for extended periods. Stock prices can ascend while economic conditions languish, especially when monetary policy is loose. Given the most recent upward trend in the market against a sluggish economic backdrop, is this a good time to invest in stocks?
It could be, but that would be akin to recklessly provoking a Hells Angel biker.
In all honesty, now may not be the ideal time to buy stocks. Rather, it appears to be a more opportune moment to consider selling. Here’s the rationale:
According to mutual fund manager John Hussman, the risk-reward balance of the S&P Index has plummeted to its lowest levels in the past century.
“This should raise red flags for anyone familiar with market history. Of all the investment maxims being touted as reasons to accept market risk, the advice ‘buy low, sell high’ is conspicuously missing. In the current climate of excitement surrounding quantitative easing, the existing market conditions have historically been linked to negative outcomes.”
Caveat emptor. Exercise caution when investing.
Sincerely,
MN Gordon
for Economic Prism
Return from Present Conditions and Negative Outcomes to Economic Prism
