Sunday, October 19, 2008

So You Want to Buy for the Long Term

I had a biology teacher in high school, Mr. Haines, who on day-1 suggested those of us who studied and worked hard every day would be able to achieve an A-grade in his class. But he also made an alternative proposal: anyone who would write (by hand, on paper) the numbers 1 to 1-million sequentially, would be guaranteed an A regardless of how they fared in any other facet of the class, even attendance.

There was a buzz about the class and two or three students immediately went to work on this. As others began to join in, more began to follow. Within five minutes more than half the class was writing down numbers on lined, college-ruled notebook paper. By the end of the hour-long class, more than half of those who had started were already giving up, leaving roughly a quarter of the students working on this easy money assignment. The start of class the next day there were only 2 pupils still at work; the end of that week only one; the start of week-2...exactly none.

Where is this going? I don't know, but I think about this event at least once a year. Usually, what a sadistic biology teacher I had in 10th grade, but more interesting to me is the way the numbers of participants started cascading higher. Once more than a few had joined in, other students followed along, which inspired others to follow as well, even though there was very little fundamental value in this project.

I really do believe we are in the midst of a reasonable rally just now, but I have to say that the number of times I heard market participants discuss the long term value of buying the market at these prices was initially concerning and now, increasingly alarming. Today it is worse than yesterday, which was more than the day before. This is not the wall-of-worry sentiment which keeps me buying in an up-market. This is concerning.

As I see it, over half the class at the moment is busy writing out the numbers 1 to 1-million. They know they will one day look back at market prices from October 2008 and they will not believe the incredible values. Mr. Buffett's op-ed piece in the NY Times on Friday was when that opinion began cascading.

How many times recently have you heard (or thought yourself) that when we look back at October of 2008 we will be amazed at the amazingly low prices?

I don't like to go on record in calling the future, but I do know what the end of a bear market is supposed to look like - the majority of participants are not salivating over long-term value - the majority of participants should rather never want to touch the stock market again.


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