I spoke to a friend who expressed a sentiment that's pretty common: "Damn! I had a feeling that I should have put money into stocks when it got down that far two weeks ago!" He missed his opportunity to buy at the bottom.
News Flash: NOBODY buys at the bottom. That's what makes a bottom. A money manager friend once wrote in his annual letter to clients:
"We never buy at the bottom or sell at the top. Therefore, when we buy a stock for your account, you should expect that it will go down after we buy it. When we sell one of your stocks, you should expect that it will go up after we sell it."
Q. So what should you do now in the aftermath of a 20% rally? A. The same thing that you should have been doing all along. We're still presented with a great opportunity to invest in stocks for a long-term horizon. The events of the past two weeks should not have changed your strategy, which should be to buy high-quality assets at distressed prices. Stock in a good business that trades at 12x earnings is a bargain. The fact that it traded at 10x last week shouldn't alter your decision.
Many people got scared out of the stock market over the past six months-- often with good reason. But now that they're out, they're kicking themselves for not buying back in. Don't succumb to the tick-by-tick moves. Continue to invest in high quality individual stocks with attractive valuations. A stock that fell from 50 to 20 over the past year may still be a great investment. The fact that it touched 16 last week is immaterial.
But if you're truly worried about chasing this rally, here's a suggestion: enter good-til-cancelled limit orders down 10% or so. Even if the market is about to triple, it won't go there in a straight line. There will be further declines. Buying the dips makes theoretical sense, but in practice it's hard to do. We celebrate rallies and despair declines. GTC orders help to instill discipline.
I just returned from a long weekend in Las Vegas. Although I've heard plenty of stories about bad times and low room occupancy rates, the hotels and restaurants were busy. Granted, it was a weekend of the NCAA basketball tournament and the start of college spring break, but it I had some trouble getting golf tee times and restaurant reservations.
My wife works at a women's clothing store in our town. Last weekend they set an all time record for sales volume. She reports: "People are leaving for spring break and they need clothes. They don't care about the economy."
I watched Barack Obama on 60 Minutes last night. Gotta give him credit-- he's out there delivering his message. CBS last night, NBC's Tonight Show last week...I'm sure that ABC will get its chance soon too. He's very media savvy. A confident leader can be very effective in these troubled times.