DOLLARS & SENSE

Time to invest in the stock market?
By Eric Alexander Wilson, CFA, FRM Telecom Analyst Actinver Casa de Bolsa • April  2009

It is most definitely the right time to invest in stocks, despite continued volatility. Several signals in the US indicate that although the recession is still here, economic recovery this year is just around the corner, although it will be gradual.

Equity investing is risky, but history has proven that stocks provide higher returns than any other asset class. Sooner or later the stock market will regain ground. It is difficult to predict exactly when the markets will hit bottom; nonetheless it is a fact that the best entry point is when the markets are at their lowest.

Remember that the most successful investors made their millions because they understood and applied the most basic rule of the stock market: buy low, sell high. Buy in when markets are depressed, when there is no end of negative news, and when everybody else is selling off and running away with few hopes of recovering their losses.

We also need to recall that the history of economies and markets shows that they are cyclical. Nothing is linear. Nothing goes up forever, nor does it fall forever. Hence, the best action within a cycle is to enter the market when it is falling, to be near its lowest point, and to exit when it is near its highest point. Of course we stress again that determining these highs and lows is very difficult.

Furthermore it is crucial to be well informed about events which affect the market direction, and to understand the products or assets you wish to invest in, be it in mutual funds or stocks. Also critical is good investment counsel.

The graph shows the most common errors when entering and exiting the market.

If history has taught us anything, it is that human beings are not good investors, for one simple reason: fear of losses overcomes the desire to win. Losing 100 pesos hurts more than winning 100 pesos feels good. Generally the behavior of the majority of investors is explained by the graph, which shows that we buy when we should sell, and we sell when we should buy. A very common practice is to apply average pricing to an investment that should be sold. Many think “if you liked at 40 pesos, you should love it at 30.”

The idea of this exercise is to interpret the current situation. Are the markets forming a bottom as recent signals suggest? Probably yes. Even though volatility will likely continue, we could be in the last stage of the financial crisis in the current year. There are still various fixes needed in the US, such as the regeneration of bank lending, stabilizing consumption and stimulating recovery of the housing market. The global recession will continue this year, but the market is starting to believe that economies will recover by next year. And we must remember that the market always reacts in advance of the fact. Email to a friend

Eric Alexander Wilson
E-mail: ewilson@actinver.com.mx

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