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MAKING CENTS OUT OF THE NEWS
Blog #27
(August 25th, 2011)
Will You Travel the Chicken Little Route or take the Templeton/Buffet Highway?
By Tom McAllister, CFP®
During every one of the past fifty years that I’ve spent commenting on the markets and the economy, one thing has always been true: the public is stirred up by the press. In both mainstream media and at least some of the financial press, investors are being stirred to fear. Precisely what is being ”stirred” right now is fear that a 2008-like recession either has already started, or is soon to be underway.
For fourteen years, from 1962 until 1976, I represented Merrill Lynch on the radio, presenting “The McAllister Report”. Throughout those years, and in all the years since, there have been commentators shouting “the sky is falling!” Without fail, the economy always recovered after prices adjusted, with the markets anticipating the comeback. As I’ve expressed in several former blog posts, looking at our economy today, I see at most a 25-33% chance of a recession, at worst a mild one. The excesses in our economy that would cause a severe recession are simply not there!
Readers should ask themselves the following question; “Do I believe that the United States economy, along with the economies of our trading partners around the world, will be larger and stronger five years from now?”
If your answer is “no”, then, by all means, shy away from equity markets. But, if you believe, as I do, that the answer is “yes”, then look to the words of the late John Templeton:
'Try to buy at the point of maximum pessimism' ...you're looking for those periods of time when investors are just so frustrated...so negative...that it does allow you to, with a higher degree of confidence, put more money to work."
(While Templeton is dead now, his philosophy still is utilized by his successors who have run the Templeton Funds, continuing the founder’s record, with outstanding results over the past 55 years.)
America’s best known and most successful investor, Warren Buffet, has followed this same philosophy. Buffet has been spreading the word recently that the stock market is offering some outstanding values these days, values of which he is taking advantage.
Yes, housing is still in the dumps, but this was expected as foreclosures continue to depress home prices all over the nation. Prices are under extra pressure in CA, FL, AZ, NV, and other former hot spots from the “bubble days” of the early 2000s. How do those facts indicate action? Using the same Templeton/Buffet philosophy, now is a great time to buy a home or refinance a mortgage, with mortgage interest rates at the lowest levels of my adult lifetime. Home prices will stabilize over coming months, foreclosures will return to normal levels, and new home building will pick up again. All this is in the cards as adjustments continue to flow through the economy.
I urge my readers to be buyers now. The stock market, especially after being knocked down 15% or so the last month, is a bargain. Could it go lower? Of course, especially with the mainstream media focused on negative economic news every day. But that is precisely why it’s time to act. If not now, when? Will you be Chicken Little or follow the Templeton/Buffet highway to the future?
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