Thursday, December 22, 2011

A Familiar Pattern: Investors Buying High, Selling Low

This recent CNBC article highlights the fact that equity mutual funds continue to have substantial outflows. Apparently, investors have taken $ 34 billion of of equity funds while buying lots of bonds.

Investors Lose Faith in Stocks as Billions Pour Out of Funds

Contrast the above with this New York Times article from back in 1999:

Fueled by Market, Stock Funds Received $26.4 Billion in March

Investors poured about $26.4 billion into stock mutual funds in March, the biggest monthly inflow since last April...

So in 1999, roughly 12 months before the market peaked and the bubble started to burst, investors were buying stocks hand over fist.

Now many investors want nothing to do with them.

Unfortunately, it's a reliable pattern.

Verily, hedge funds are having a terrible year, having been caught "short," as well as underinvested with only a 43.8% net long investment position. Or how about the endowment funds that are only ~12% net long US stocks? How can those endowment funds achieve their mandates of roughly 8% per year using 2%-yielding 10-year Treasury Notes? The answer is they can't! - Jeff Saut in this recent Minyanville article

So it's not just the individual investor. As has been noted in prior posts, pension fund managers in the early 1970s went from buying stocks aggressively at very expensive prices (50x and higher P/E ratios) then wouldn't touch them several years later when they'd become much cheaper.

Stocks may go even lower for a period of time but they're never cheap when the news is good.
(The market overall right now may not be extremely inexpensive, but it's not difficult to find cheap individual stocks.)

As far as price action goes, it's impossible to know what will happen in the short or even intermediate term. The Market will continue to behave rather manic then depressed over shorter time frames but, in the long run, the "weighing machine" still works.

Buy shares of good businesses at a nice discount to value then ignore the near term price action noise.

Adam

Related posts:
Investors Can Have Cheap Stocks or Good News...Not Both
Rear-view Mirror Investing

This site does not provide investing recommendations as that comes down to individual circumstances. Instead, it is for generalized informational, educational, and entertainment purposes. Visitors should always do their own research and consult, as needed, with a financial adviser that's familiar with the individual circumstances before making any investment decisions. Bottom line: The opinions found here should never be considered specific individualized investment advice and are never a recommendation to buy or sell anything.
 
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