Rational Investing: Better tomorrow on horizon for positive investors

Clark Davis is a 34-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money-management company.

The war is over! All is well! The bull market is returning!

Whoa, hang on a minute. Let's talk about this a bit. A bull market, as witnessed in those halcyon days of "Buy a stock and take your profits the same day," is not back. Hopefully it won't return for a long time. And the tech mania that consumed the novice traders, especially the ones who quit paying jobs with the intention of making a living jumping in and out of stocks, has gone from a roar to a murmur.

Real bull markets require a growing economy, consistent corporate earnings across a broad range of industries, and (this is very important) a positive mindset among investors.

That's where we are now. The economy is growing, but not at the rate that many would like. (It's interesting that some pundits are disappointed that it is not cranking up to full speed immediately. I don't know of any moving thing that doesn't have to work its way in stages to achieve optimal momentum.) Corporate earnings are improving for the majority of listed companies, although, as the pessimists love to point out, from a lower earnings base.

But the most interesting aspect of the bull market troika of events is the psychology that is changing. It is not unusual to see a company report earnings that are slightly below expectations (or below the mysterious, and little mentioned, "whisper number") and yet the price of the issues increases. Contrast that with this time last year when corporations that didn't exceed earnings expectations were severely punished.

Until a psychological miasma is replaced with a strongly optimistic attitude, even the weakest bull market is likely to die aborning. (Miasma and aborning in the same sentence wow, I've never done that before.)

I am not saying, or even suggesting, that all is well. All is never well. There are always reasons to not do something. Nowhere is that more apparent than in making investment decisions. There are probably millions of people who have never invested until markets have topped because they were waiting for something to look better the price of oil to come down, junior to graduate, or whatever.

By the time all the negatives are removed, so too are most of the profit opportunities. It is still a "buy low and sell high" discipline that creates wealth, but buying low means buying when others are rushing to sell, when markets look like they are going to hell in a handbasket. A year from now there will be many, many investors saying, "I shoulda picked up that stock last year when it was at xxx."

What follows is our recent monthly letter to our clients in which we discuss the psychology in somewhat lyrical terms:

The first time I saw "Annie" on stage I missed the subtle change in the lyrics of "Tomorrow" as Annie's life improved. Initially she longingly sang it in the orphanage and it ended:

"Tomorrow! "Tomorrow! I love ya, Tomorrow! You're always a day a way!"

As her fortune changed for the better, as it does in most musicals, the ebullient Annie sang:

"Tomorrow! "Tomorrow! I love ya, Tomorrow! You're only a day a way!"

And our tomorrow?

With the war winding down investors can now take a deep breath, click off CNN or Fox or whatever source they used to view the war. (I imagine some were micro managing it from their family rooms.)

The focus will now begin shifting to the economic drivers of market and individual investment valuations. Of course, the volatility will not disappear completely, as there will always be something out there for the pessimists to worry about. My guess is that the next round of negative thinking will have to do with how long we will have to maintain a presence in Iraq. With terrorists like the homicide bombers still running around, markets could also react short-term to hit and miss attacks on our troops. Others may worry that Syria is next.

On the positive side, with fewer folks transfixed by TV coverage of the war and staying inside to watch it unfold, I expect that retail spending will be picking up. That is further indicated by the very positive increase in consumer sentiment registered last week. And with interest rates at all-time lows, refinancings are freeing up billions of dollars for investment and capital expenditures.

The worst is now behind us. For those who hadn't experienced a bear market before, it was a gut-wrencher. For those of us who went through the anguish of 1973-1974 it was certainly not pleasant (to quote Yogi, "It's dj vu all over again."), but it was mitigated by the knowledge of the financial success that followed that earlier bear market.

You were right, Annie.