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Friday, May 15, 2009

Always Late to the Party


The NYT writes about how investors that fled stocks at the end of the year are now, after the s+p 500 has risen about 32% since early March getting back into stocks (see the s+p ytd above). Human nature never changes and people often perceive risk incorrectly seeing stocks as less risky after a big move up and more risky after a big move down. In fact the reverse is the case and those like us that never fully liquidated our stocks were in for the quick rally.

The crowd will probably give the market some more upward momentum which we are happy to ride. But fairly soon we will sell off some of our gains to kept our asset allocation in line and buy more if there is a significant market drop to keep at our asset allocation. Of course if experience is any indicator many individual investors will be buying more on the further rally and selling at the selloff.

And note how the individual investors mentioned ignore some basic rules to avoid: over concentration in a single industry, avoiding lottery ticket small cap growth stocks which have a good story but dont necessarily make good stocks. Unlike Peter Lynch's advice years ago to buy stocks based on your experience with the product evidence shows it is ofen not the case (sirius and xm, boston chicken etc)

From the NYT(my bolds)

May 16, 2009
Testing Wall St.’s Waters, but Not Getting in Too Deep
By JACK HEALY

A woman on Long Island opened an Ameritrade account and started buying stock in mining companies. In Chicago, a developer in advertising is betting heavily on oil. And outside Seattle, a Microsoft employee is snapping up shares of technology firms and retailers.

After being pummeled in Wall Street’s plunge last year, many small investors pulled out of stocks. But the stock market’s recent rally — one of the sharpest since World War II — is starting to beckon some of them back.

So step by nervous step, some smaller investors are beginning to tiptoe back in. They are pulling money out of their savings accounts and money market funds and buying stocks and bonds, fingers crossed....


Still, some investors smell profits in the wind, and are ready to come out of hiding and try to make money again. In Wall Street’s endless battle between fear and greed, they are starting to feel the tug of greed.

Investments in safe but low-yielding money market mutual funds have fallen by $117 billion from their record highs in mid-January through this week, according to iMoneyNet. As people began to look for higher returns on their money, some $47 billion surged into mutual funds tied to stocks and bonds in April, according to the Investment Company Institute. It was the largest influx of money since 2007.


“We’ve been a lot more active in the last six weeks than we were in the last six months,” said Mitchell Slater, a financial adviser at Smith Barney in Florham Park, N.J. “It’s not everybody on the boat, but we’re definitely seeing some of our clients realize, at least in their minds, there’s opportunity now.”

.”

But others returning to the financial casino have not done as well.

....And other investors said in interviews that they had made familiar mistakes: waiting too long to buy, getting in at the top of a small peak, bailing out just before a falling stock turned around.





The WSJ had a similar article today headlined

Many Bought Shares High, Sold Low

I think know what the rest of the article is like

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