Should You Invest In Stocks Now?

Should you invest in stocks now?

With the market down 30% from the peak, I’ve seen many variations of this question in recent weeks. Mostly people who dollar-cost average by adding money from every paycheck wondering if they should increase the amounts they put in since the market is “on sale”. It’s an understandable question — I load up on Lucky Charms when they go on sale.

Ok, number one, nobody is qualified to answer this question for you, so let’s get that out of the way. While I hope the following will help you come to your own answer, the learning opportunity here is to get a better understanding of how markets work.

We need to address the mistaken presumption in the question. There’s a bit of a myth that the market is cheaper today. Well, this is true if you compare current prices to past earnings. But markets look forward. Lower nominal prices do not mean bargain. If fundamental deterioration was steeper than the price decline the market is actually more expensive. What a buyer is really interested in is whether the prices are a better value. If Trader Joes sells bruised bananas for half price, the cheapness is for a reason. Right now corporate America’s prospects are brown and soft. Is 30% the right discount? It’s a coin toss.

The market from a bystander perspective is nothing more than the fair point spread. In other words, whenever you put money in you are basically investing at the fair price. I’ll preempt some pushback to that by saying this perspective is a bit scope dependent. There are people who make money in narrow niches of the market that can be mispriced. Dislocations and liquidity frictions can mean opportunities for those experts. Just like if you were an expert in your local real estate market (have great contractor and banker relationships, got the look from the broker you grew up with, some other form of private info), market turmoil could lead to some easy layups. But zoom the scope out until you are a tourist and you are back to tossing fair coins.

This is always the case when you put money in the market. The price balances the buyers’ and sellers’ consensus of the future. Right now all buyers and sellers are meeting at prices that assume earnings in the future will be worse than they expected back in January. If you bet on Bucs to win the Super Bowl this year and Tom Brady gets hurt, the price to bet on the Bucs will get cheaper. The lower price to buy them is probably an equivalent value to the higher non-injured Brady price. It just reflects bleaker fundamentals.

Let’s belabor the point from another angle. The silliness of statements like “I’m a buyer of the market if it goes down to 200” when it’s currently trading for 3000. The unsaid assumption baked into that statement is “all else equal”. Well duh, all else equal, when the market is trading for 3000 there’s a stack of bids from 2000 to 3000. The only way your 2000 bid becomes in play is if the world is different. A bid is an inherently conditional statement. I wish I could have bought my house for $200k. But if my neighbor’s house ever goes on sale for $200k, it’s more likely we’re about pestilence deep into Egypt’s 10 plagues than I’m getting the deal of a lifetime.

Evergreen advice

It’s widely understood that the average stock picker is no better than chance at figuring out what a value is. A full-time endeavor whose output is no better than chance. The conclusion is obvious. Trying to time or beat the market is a low-yielding object of attention. You cannot do this reliably or repeatedly. Not worth the brain damage to trying to decipher if the market is a value. You aren’t counting cards to overbet a stacked blackjack deck here.

Focus your energy on understanding your liquidity needs. Give that exercise its full due. Only you have visibility into your family’s income in a slowing economy. Make sure you have the cash you need to live. Nothing has changed about the fact that the market tempts you with a reward in exchange for volatility. If the risk is suitable, stick to your regular plan.

(Mandatory disclaimer…I’m not giving investment advice. I’m not qualified and have zero credentials.)

A word on market consensus right now

The debate rages on whether the market is oversold or has a lot further to fall. The market price collapses the expected value into a single number. There’s plenty of smart-sounding people with models and forecasts and opinions and degrees on both sides of that price. All of these ideas are swamped by the other market-based consensus: the volatility. The options market is pricing the 1-year standard deviation of the SP500 at 40%. This is about 2x the market’s typical confidence interval. Volatility is a more actionable input into your investment process because it directly feeds into the thing you should be thinking most about — your cash requirements for upcoming expenses. If that kind of volatility is intolerable given your upcoming liabilities (retirement, college, buying a house, and so on), then you are overexposed. Stock returns have always been an award with strings attached. Volatility is not just small print. It’s a double-edged feature. If it didn’t exist markets would not offer a reward.

Leave a Reply