Thursday, June 15, 2006

Stupidity And Stocks

The Times of London, formerly a newspaper of notable credibility, seems to be chasing the New York and LA Times down into the sewers of rumor-mongering and defeatism. In this case I am noting the article written by one Anatole Kaletsky, who warns readers that the Stock Market is in for a bad go of it, and we might as well give up now. What a putz.

Kaletsy is at least honest about his message; the title reads “Stop Celebrating. The markets are not rallying. This is a dead cat bounce”. Of course, when you go through the article, you might note that the man presents no evidence to support his contention, and he is particularly poor in presenting the context of stock market development. Just as an overview of his dreck, so you won’t feel you have to wade through it, here are some of the salient comments Kaletsy makes:

“the retreat in shares and other assets which was then just beginning, has turned into a full-scale rout.”

“Share prices have been falling almost daily in every major market”

“Most industrial commodities, for example, are still worth from 50 to 150 per cent more than they were a year ago, even though demand for them is now clearly falling and is certain to weaken further in the coming months.”

“Another reason for believing that the bear market has longer to run is that so little financial pain has been evident so far.”

At the end of his article, the fact that he has gone way beyond the pier in his walk to despondency apparently even reaching his own mind, Kaletsky backs off from his tone, noting that Bernanke has good control of the Fed, that the Stock Market in general is sound and headed in the right direction, and that inflation is hardly the threat the media makes it out to be. But this is the CYA stuff that hypocrites toss into their articles so that when their promises of doom fail to materialize, they can try to weasel out. Kaletsky is playing ‘prophet of doom’, but without support for his claims.

The Stock Market does carry risk, of course. Even the most bullish investor is aware that every prospectus warns that you are putting your money at risk in any investment. That said, US Stocks have risen by an average of 11% a year between 1926 and 1999, and by 18% a year between 1990 and 1999.

That’s better than you can get from bonds or bank deposits, and this should be understood when making any decision. There are people who just throw money into a stock or mutual fund without any serious look at the performance of the companies or the risk they are accepting; this is not much different from hoping you will get lucky in a casino. If you take the time and make the effort to do your homework, you can learn a lot about a company’s stability, market position, and potential for growth, and from there you can make an informed choice with good reason for optimism.

American stocks are a much better buy than foreign stocks, generally, because of Sarbanes-Oxley. This is not to say that all American companies or stocks are superior, but Sox creates a level of accountability for upper management which also improves the transparency of operations and reporting. Companies do not like the added expense, but in the long term the provisions make the financial statements more credible and the company more stable, which are critical components to any successful company and investment.

While foreign stocks do not have the same stability and credibility of American stocks (the PRC, for instance, does not allow independent audits of companies associated with the Central Committee), the basic premise still holds; if you find out about a company before investing, you can decide what the most likely performance you may expect to see before committing to an investment. Be careful, but there’s no reason to be a Kaletsky.

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