Markets Can't Go Up Forever

 | Dec 10, 2013 | 3:00 PM EST  | Comments
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Stock quotes in this article:

de

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msft

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gm

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ibm

Funny what a few years can do to the psyche of market investors. Five years ago today there was a furious rush to exit securities, and for several months after it looked like stocks were dead money. Today, it appears the tide has turned -- not owning equities looks like the dead-money bet. It appears that one can logically conclude that most investors simply invest with a short memory span.

Many investors also operate with a skewed bias. When the market was falling in 2008 and early 2009, investors tended to believe that stocks can fall indefinitely and become worthless. On the other hand, when the market is climbing higher and higher, as it is today, the belief shifts into thinking that stocks can go up forever. The human psyche operates in extreme fashion when it comes to matters of money.

Here's an accurate market truism: Markets can't go up forever. All tops must come to an end, and trying to time this one can be more dangerous than ever given the Federal Reserve's current involvement in providing liquidity.

So if you find yourself buying in today without a sound valuation-based parameter, you are assuming a high degree of market risk. What you want to do is shift the investing risk profile to skew towards the specific company and away from the market. Just as a rising tide lifts all boats, a severe market pullback will take nearly all stocks down with it. Market risk cannot be eliminated completely unless you leave the market altogether. You want your investments to be made intelligently, so don't jump ship at the first sign of trouble.

The pool of available and attractive investments today is clearly small: Stocks at or near a 52-week high outnumber those sitting at 52-week lows by a factor of more than 20 to 1. Be greedy when others are fearful, but fearful when others are greedy.

Going into 2014, it's prudent to have security ownership and large-cap value stocks look very promising. I spoke of Deere (DE) Monday, and the company is on my short list of best picks for 2014. Microsoft (MSFT), with activist support from ValueAct Capital, looks like another interesting name. General Motors (GM), despite a solid move this year, announced that the U.S. government has sold the remaining portion of its stake. IBM (IBM), the single-largest equity investment made by Warren Buffett in years, now trades near a 52-week low of $172. While Buffett was buying when prices were in the $130 to $150 range, today's price is not far off.

The market is neither your friend nor foe; it exists to facilitate buying and selling between two parties where both seller and buyer believe they're getting a good price. Treat the market agnostically and focus on the assets and the prices they command for your investment decisions.

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