Thank you for your insight and open discussions. It is refreshing to hear someone bring some balance to the discussions and provide truth rather than fiction for the right wing agenda

Dean,

I would like to know what kinds of investments you would recommend in this environment. I'm pretty much sitting on cash. Stocks don't look good because of recession; bonds don't look good because of the sub-prime mess. I followed your cue when I was thinking of buying a home back in 2004 and instead just sat it out. I think I'm about 100K richer as a result!

Since the losses are in the past, holding (and buying) is the only common sense response.

Can someone explain to Dean why the stockmarket and housing market are not at all alike?

They can start with "sticky prices"

Unless you know something other market participants don't know (often known as insider trading) or are much better at analyzing market data than high-end investment professionals (think Goldman Sachs or better), then believing you can beat the market is foolhardy.

gladstone wrote, Since the losses are in the past, holding (and buying) is the only common sense response.

richard wrote, ...believing you can beat the market is foolhardy.

Those points have considerable merit on their own.

However, they're not really relevant to this context, because they're not usually accompanied by these considerations in the media:
(1) Most investors should buy and hold, and most investors should not be purchasing stocks but rather no-load mutual funds with extremely low costs (viz, Vanguard index funds),
(2) Stocks carry an extremely high risk in the short run; they should be used for time horizons of at least 10 years, preferably 15.

In short, while it might be true that "dump stocks now!" is a form of market timing, so is "buy stocks now!".

Since the losses are in the past, holding (and buying) is the only common sense response.

Was it common sense to hold and buy a Nasdaq indexed fund (or equivelent) on April 7, 2000 if you took some losses over the past few months? Gladstone, that was almost eight freaking years ago and look at where it is today compared to then!

I know you're the exception, but for most of us humans eight years makes up a good portion of our lives. We do not have eternity to wait to recoup our losses.

Its your money so basically remember no one has a stronger interest in it then you. The third parties you deal with have an interest in taking off their 10% or so. And free advice is worth what you pay for it (or less as Dean has pointed out). Reading Dean and others like Angry Bear and Atrios (Duncan Black) can point out long term trends that are known (mostly demographics and the growth of China and India as the Industrial Revolution continues to transition those two countries) and unknown (the mystery of productivity growth). Beware of agendas of others, both ideological and financial (stock analysts want people to buy stock afterall, real estate brokers want people to buy real estate, and Larry Kudlow wants to cut the taxes on the rich in season and out. Right now, one can't lose money in U.S. Treasuries. Long-term, buying and holding International funds I think will work out given that the growth in India, China, Latin America, Southeast Asia, and South Africa will likely be stronger then U.S. growth (but with political and stability risk) and that the dollar will continue to weaken as it has for 40 years as we insist on acting like a world empire without taxing ourselves to cover the cost. Its the fee we charge the world for being their policeman.

Just to clear up an ambiguity of my post, I am not giving advice, just my opinion and my reasons for it. The dollar has gone up and down over those 40 years, but overall trend has been down. It is this reason that the U.K. now has, at least in some respects, a higher standard of living then we do, based on the strength of the pound, a condition that has not existed, at least, since 1914, and perhaps 1885 according to some measures. You read a lot about the decline of the dollar because the effects of that decline are felt the most by the rich and near rich (who own most of the assets and who travel most frequently outside of the U.S.) and who now feel "poorer" then their equivalents outside the U.S.

Wow, Gladdy is actually making more sense than Dean, who'd have thunk it.

For long-term investors, buying and holding a diversified portfolio of equities makes sense. Investors should not react to every dip or spike.

Of course with hindsight one can find instances where this wasn't true; 1929, 1968, 2000 etc.

But then, with hindsight, we are all geniuses.

For long-term investors, buying and holding a diversified portfolio of equities makes sense. Investors should not react to every dip or spike.

I've always wondered why should equities outpace the growth in the economy over the long term? Where exactly is the growth in equities coming from? Sometimes I fear that it is a gigantic pyramid scheme. Especially looking at the run up in the past couple of decades with the advent of 401Ks and what not.

Even assuming the long-term benefits of equities. The devil is in the specific definitions of 'long-term' and the degree in value and in time of the spike or dip.

Not everyone can wait the same amount of time. Not everyone can afford the same amount of loss.

Actually, it doesn't require hindsight to recognize an over-valued market -- just arithmetic. If you look at the PE ratios, and unless you have a hugely different view of future profit growth than the rest of the world (some people do), then you can project rates of return on stock.

It was easy to see that the market was over-valued in 1998-2000, so a buy and hold strategy could be (and was) recognized as foolish at the time. The same was true at the market peaks reached last year, although the over-valuation was not as extreme. (The PE was around 35 against trend earnings at the market peak in 2000, it was around 23 in 2007.)

At the moment, with the market down 20 percent, the story is more ambiguous. Since many big investors still haven't noticed that we have a crisis in the mortgage market as a whole and not just the subprime market, my bet is that further declines are coming when the smart money gets smart.

My main compliant with the media giving us the "buy and hold" crowd is that they don't present any other perspectives. The buy and hold crowd are often wrong. The media have no business as presented them as purveyors of unquestioned truth.

So this means I should sell the 40 shares of Wells Fargo? I meant to do it last summer, but never got around to it.

Ponzi Q. Globalization wrote, I've always wondered why should equities outpace the growth in the economy over the long term?

In the long run, they can't (putting aside things like tapping into economies that grow faster than our own).

The long-run return on stocks might be greater than the long-run rate of GDP growth, but that's actually comparing apples to oranges.

Very useful and different blog I ever see..
Nice to read...
I am happy to comment here...
Thanks,

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alex45

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Great Post. I am Sick of this Post

Actually, I agree some of the views of the author and some not.

Thanks
Raushan

That's the problem with wanna bee gurus. They are great with guessing, and when their guess turns out to be wrong, well you just don't hear anything from them for a while..