17 Reasons
To Invest
In Stocks Now
by George Putnam, III, editor
The Turnaround Letter
In
the wake of the recent tragic events, many things in America
may change, but one thing that should not change is your long-term
investment strategy. We always advocate being as fully invested
in stocks as you are comfortable with for the long haul, and
in turbulent times like these it is especially important not
to veer away from a well-conceived investment program.
Right now, we see at
least 17 good reasons to stay invested in stocks, as follow:
1. Best long-term
returns. Putting the most important reason first, over the
long haul no other asset class will increase your net worth better
than stocks. Bonds or CD's may look attractive at this moment
because of their stability, but over almost any multi-year period
they will provide you with a lower return than stocks.
2. If you get out,
it's very hard to get back in. If you bail out of stocks
now and they continue to decline for a while, you may look smart.
But to be really smart you have to know when to get back into
stocks. Most people who have "temporarily" gotten out
of stocks even those who got out at market top end up doing badly
over the long-term because they cannot get up the courage to
get back into stocks until after the market has already posted
a big gain.
3. When the market
does turn up, the rise may be very rapid. For example, immediately
following the commencement of Operation Desert Storm in 1991,
the S&P 500 rose 17% in 19 days. If you get out of the market
now, you are likely to miss the next big upswing.
4. Getting out can
cost you money at tax time. If you sell stocks in which you
have gains, you will have to pay taxes on those gains. Therefore,
your new investment strategy will have to make up that tax cost
before you even begin to be better off.
5. History Lesson
(A): Stocks have typically fared well in the six to 12 months
following a disaster. The financial press has scoured the
past 60 years or so (generally going back to Pearl Harbor) to
find comparable events. In the vast majority of the disaster
events, both human inflicted and natural, the market has rebounded
sharply after an initial period of decline.
6. History Lesson
(B): Stocks are not likely to have three down years in a row.
Stocks have not declined for three consecutive years since
1941. And typically the years following multi-year declines give
you very good returns. For example, after the market declined
in both 1973 and 1974, the S&P500 rose 31% in 1975 and 19%
in 1976.
7. History Lesson
C: The current period reminds us of the Gulf War period in 1990-91.
While the enemy may be more diffuse this time, there are
a number of parallels to the Gulf War. As we mentioned above,
there was a sharp rebound immediately after the U.S. counter-attack
began in early 1991, and the S&P gained 26% for the full
year.
8. History Lesson
(D): The current situation also reminds us of 1973-74. In
1974 the S&P 500 lost 29.7% following a 17.4% loss in 1973.
This year the S&P is down about 24%, following a 10% loss
last year. As we mentioned above, 1975 and 1976 were great years
for stocks.
10. Interest Rate Factors (B): Few investment alternatives look attractive. With CD's paying three percent and long-term treasury bonds at five percent, investors will have to return to stocks to meet their required level of returns.
11. Interest Rate Factors (C): Valuations are beginning to look more reasonable. Interest rates are one of the key factors in determining valuations. While the math may be daunting to some, suffice to say that when interest rates are low, higher price-to-earnings ratios become acceptable to many investors.
12. Economic Factors (A): Inflation is low. Not all the economic news is bad. Inflation remains low, which is good for a number of reasons. In particular, low inflation, like low interest rates, leads to higher stock valuations.
13. Economic Factors (B): Energy prices are coming down. Lower energy prices will help the economy to recover more quickly.
14. Economic Factors (C): The government is beginning to pump money into the economy again. The recent events have prompted the Bush administration to open the spigots, in defense spending and several other areas, more than originally planned. This will eventually give the U.S. economy a boost.
15. Stocks tend to rebound six to nine months before the economy begins to recover. We may be going into a recession, but it probably won't last that long, given all of the fiscal and monetary stimulus now underway. Even if the recession lasts a year, given the stock market's tendency to anticipate an economic rebound, we could see stocks begin to turn up in just a few months.
16. Companies are buying back a lot of their own stock. One of the key drivers of stock prices is earnings per share, or EPS, which is a simple calculation of total earnings divided by outstanding shares. When companies buy back shares that shrinks the divisor and gives you higher EPS even if the earnings stay flat. Higher EPS numbers will lead to higher stock prices. And if earnings begin to recover, the buy-backs will magnify the effect on stock prices.
17. There appears to be a lot of cash on the sidelines. Nervous investors have been pulling money out of stocks for months, and the pace appears to have quickened dramatically after September 11. Eventually, that money has to be invested somewhere because few people are likely to leave it in cash earning two percent for very long. As we said above, there are few attractive alternatives, and so much of that money will find its way back into stocks pretty soon.
Taken together, these points strike us as a compelling argument to invest in stocks right now. Of course, there are no sure things, particularly in the stock market, but we strongly believe that there are greater risks in being out of the market now than being in it.
Editor's Note: George Putnam, III is editor of The Turnaround Letter, Suite 801, 225 Friend St., Boston, MA 02114, 1 year, 12 issues, $195. Visit the web site at www.bankruptcydata.com.
