Should you buy now or wait for a better time?

October 2nd, 2008

The U.S. government bailout plan seems to be on hold for now. As a result, the market continues its free fall. Since the beginning of the crisis in October 2007, the U.S. market has lost about 25% of its value. The emerging markets sunk even deeper – about 36%. Usually, the best time to buy stocks is after these kinds of declines; is it still the right move to make now?

The financial sector should mostly be affected by the current crisis. However, many other, non-related companies have lost value tremendously. There is no logical reason why healthcare companies, for example, won’t continue earning substantial cash in the near future. Thus, the recent declines have made many stocks very attractive. In addition, the U.S. should mainly suffer from this crisis. However, other countries (not only emerging countries) that should not necessarily be affected from it also experienced sharp declines, which has made investing in them currently attractive.

After the commodities bubble burst, commodity prices declined sharply to a point that seems much lower than to what it should be traded at. Therefore, investing in the stocks of commodity-related companies (but definitely not in future contract) at current prices could be interesting.

On the other hand, the common analyst on Wall Street will tell you just the opposite. They will tell you that the financial sector is still scary and unstable. Thus, other banks will probably collapse in the near future and drag the market further down. Also, the level of volatility is currently too high for you to jump into stocks; you could lose substantial amounts of your investments in a relatively short period.

Analysts will probably also tell you that there is a growing number of companies that predict declines in their earnings in the next few years, since the sub-prime results still affect not only the real-estate sector, but other sectors as well.

So, who’s right?

Well, Wall Street has always had a short memory. Too late after every main market drop occurred, they recommend you sell your position and keep your savings in treasury or cash; and, crisis after crisis, they were wrong. Usually, after the market bottoms out, it quickly soars. If you’re not holding stocks at that point, chances are that you won’t catch this fast moving train before it leaves the station. So, the best advice is to invest in stocks all the time and definitely after substantial market declines.

It’s definitely not the right time for everyone to invest in stocks. Since the market is currently very volatile, the short-sighted investors who check their positions on an hourly or daily basis should probably reduce their exposure to the stock market. However, for long-term investors, those who intend on investing for at least 3-5 years into the future and can bear additional temporary losses, the current period is the best time to invest. I’m sure that in 5 years from now this crisis will be history. By picking the right stocks now, your chances of earning money are much greater than losing money in the long term.

Last 5 posts by Yinon Arieli

• How cheap are stocks now? - October 26th, 2008
• New Wall Street Terminology - October 18th, 2008
• What does Warren say? - October 15th, 2008
• Understanding Fundamental and Technical Analysis - September 27th, 2008
• Who’s going bankrupt next? - September 22nd, 2008

Entry Filed under: Stock Investing Ideas