Jimmy peeked around the door. “Got a minute? I had to pick up a couple of things at the store and thought I’d stop by and ask a quick question.”
“No problem. Come on in. If you’ve already bought what you needed, I hope ice cream wasn’t one of the items.”
“Jimmy, we never get into a quick conversation when you have a quick question, so if you did get ice cream, just stick it in the freezer in the lunch room.”
“Nope, no ice cream. Here’s my question: I don’t see what could move the markets now that most of the earnings have been reported for the last quarter. So, I’m wondering if I should sell off some of my positions and hold on to cash ‘til this quarter’s earnings reports start coming in. What do you think?”
In the 20 years I have known him, Jimmy had never been so nervous before to think so short-term with his portfolio, so we had a chat about the differences between a quarter-by-quarter focus for long-term investors, as well as the prevailing negative investor psychology.
The litany was a familiar one. We covered the pros and cons of being concerned about the macro view, including the several European Union countries’ debt problems, unemployment, the potential cost of the President Obama’s health care package, TARP and even the balance of trade.
“We’ve hit a lot of the things that folks consider negative, haven’t we? Now think about this, Jimmy. What could go right? Suppose all this concern gets turned on its head because good things happen.”
He nodded, “Good things, huh? That would catch a lot of people off guard, wouldn’t it?”
“Probably a lot of people, especially the ones who have been stashing dollars in money market funds out of fear or uncertainty about the markets; the kind of folks who all too often are influenced by media telling us how bad things are. Those are the ones whose absence from the market has been one of the factors in the low-trading volume – volume that is that is now more than 70 percent institutional.”
Although we became easily distracted by reminders of what has gone wrong, we spent most of the next half hour or so discussing what could go right, and agreeing that most of the things that could go right would not get the coverage on either the front page or as a lead during the evening news equal to what the bad news had garnered. Some of the points were: BP’s cap of the Gulf well holding and the environmental damage being less than the doomsayers predicted; the European debt problems continuing to be manageable; the administration announcing that it would extend the Bush tax cuts; cap-and-trade legislation being tabled; housing starts increasing; and private job creation climbing at a rate greater than expected.
On our list, we concluded that the one most likely to have the greatest near-term, and probably lasting, positive impact on the markets would be extending the tax cuts, as not just corporations but individuals, as well, could get a better handle on longer-range planning.
Evidence of the power of the unknown in affecting business decisions is apparent in the nearly $2 trillion in cash that corporations now have on their books.
We talked about the fact that $2 trillion can be used a lot of ways; hiring, dividend increases, new plant and equipment, market expansion and stock buybacks came immediately to mind.
“Jimmy, the bottom line, as they say, is that the investing public, long exposed to bad news should be prepared to respond to, even anticipate, good news. One way to do that with equities is to continue acquiring high quality common stocks in necessary industries – stocks that have paid dividends many years and that are likely to increase those dividends. It’s old – but sound – advice, especially for those who are sitting on the sidelines bemoaning the low interest rates paid by CDs and bonds.”
And unless you, unlike Jimmy, are an experienced, nimble trader, hang on to those issues. Don’t try to time your buying and selling of them on the basis of quarterly earnings reports.
So, as usual, Jimmy’s “quick question” led to our usual “not-so-quick” discussion.
Good thing he hadn’t bought ice cream.Clark Davis is a 37-year investment veteran and CEO of St. Louis Investment Advisors, a specialized money-management company. He can be reached at email@example.com.