Tuesday, January 27, 2009

Return to their Rightful Owners

"In bear markets, stocks return to their rightful owners"

--old investment aphorism, variously attributed to J.P. Morgan and others

Who are the "rightful owners" of stocks?

When I started in the business, it was fairly uncommon for individuals to own stocks. 401k accounts were a relatively recent innovation, and mutual fund ownership was picking up, but not many people owned individual common equities-- just "rich people".

By the time the tech bubble peaked, it seemed as if everyone had a stock portfolio. Remember the cocktail parties of that era, when the guys would talk not about sports or women but about stock tips? Much of that vanished with the bubble, but stock ownership by middle-class households remained high.

The hedge funds had been around for a long time, but they only became a major influence in the stock market in the past 10 years. They own plenty of stock, but it would be hard to call them rightful owners.

I believe that the rightful owners are those who are long-term investors based on an informed opinion of the company's prospects. It's a key difference between investors and traders.

Today I saw several market opinion comments about how dull the market had become. The Dow has been up or down less than 100 points in 7 of the last 10 trading days. My guess is that we're getting close to a stretch of dull market days as investors gradually give up on equities. Many traders will exit if a low volatility environment limits short-term opportunities. But many individuals, currently waiting hopelessly for the rebound in their 401k funds, will also throw in the towel.

That's what will create the bottom. It won't necessarily be a technical (chart) condition or a spike down to a level where everything is just silly cheap. Rather, we're likely to be endure a period where market participants gradually get bored with the market, volume drops, and nobody cares anymore. By that time, stocks stocks will mostly be back in the hands of their rightful owners. May take a while, and it will probably be accompanied by a slow grind lower. But it will be a necessary condition for the bottom.

Portfolio update: I started a position in CAT yesterday following their earnings report as it dipped below my targeted entry point. I like the company and will look to add if it trades down to 30. I began a very small position in GE last week, and I'm waiting for them to lose their AAA rating or cut the dividend before adding. I don't really trust GE, so I'm being very cautious. Other portfolio holdings: ABB, BA, CSCO, DD, GOOG, INTC, SLB, and SYY.

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