Archive for October, 2008

Don’t rush to buy

Thursday, October 9th, 2008

This is not the time to rush into buying stocks or a house.

Yes, the prices are down, which is nice, but the time to buy is when something has fallen, not while it is still falling.

Financial prevailing wisdom has well-meant but contradictory, clashing advice:

  • Don’t try to time the market
  • Buy the dips

First of all, buying the dips is by definition trying to time the market.テつ The only truly non-timing approach is to automatically spend a fixed amount of money to buy the same thing (an index fund, for example) at predefined intervals.テつ If that’s what you’re doing, at least your approach is logically consistent, so skip the rest of this post.

For the rest of us, who buy and sell based on individual, discrete decisions, that’s a form of timing, and in that sense it’s not necessarily a bad thing.テつ It’s inherent even in a valuation-driven investment decision:テつ this is a good value NOW, but I didn’t buy a month ago because it wasn’t a good value THEN.テつ Timing.テつ Q.E.D.

Now that we’re over that hurdle, I have a general and a specific opinion about buying now:

  • In general, don’t buy an asset that’s falling.テつ Every day for 18 months there’s been some expert or another telling us that “today’s drop looks like the bottom.”テつ That’s nonsense.テつ People who heard that and bought are now so deep in losses that they’re panicking and selling.テつ Buy high, sell low is not the way to succeed.テつ Wait until you can say “that was the bottom, back there,” meaning a month or more ago.テつ You may have given up some appreciation in that month, or you could still get caught by a renewed fall, but you’re putting the averaging power of time on your side.
  • Specifically,テつ many of the best professional value analysts in the world are getting sliced to ribbons right now.テつ One day they buy a stock or a bond, and the next day the issuer is bankrupt.テつ For example, AIG got tipped into the abyss partly because they held some short-term Lehman bonds.テつ Who knew?テつ Valuations are opaque at best.テつ No one knows who’s in trouble, or who will fall next.

It’s chaos out there.テつ Put your money back in your pocket and sit on your hands until the dust clears.

bailout summary

Wednesday, October 1st, 2008