Rational Investing: Sign of market bottom now appearing

OK, folks, we may be seeing the signs of a market bottom. They're the opposite, sort of, of the signs we wrote about a couple of years ago.

At that time we talked about the signs to look for that would indicate a market top. Using the same signs from a different perspective indicates that the market is at or near a bottom. (We won't know the real nadir until well after the fact, probably several months from now.)

As you read what follows replace the word "bull" with "bear," and "mania" with "panic." That will show why we say it's sort of the opposite of what we wrote in '98. Here's what we wrote then (and what's happening now):

"Anecdotal evidence of investors getting carried away can sometimes be found in a number of ordinary-appearing occurrences. Examples of signs that market mania is rearing its head include: The cover of Business Week, Fortune, Time, or Newsweek showing a bull on Wall Street or pronouncing that stocks are the only place to invest. The more of these, the stronger the mania." (The recent covers of Time, Newsweek, and U.S. News & World Report were either pictures of bears or warnings about the market and/or the economy.)

"Two or more books about stock market investing on the New York Times Best Seller list." (It didn't make the top ten best seller list, but Bob Woodward's biography of Alan Greenspan created a stir.)

"When, at social gatherings, more people are talking about their investments than their kids." (You'll have to keep your ears open for this one my crowd always talks about grandkids.)

"When your barber/stylist/hairdresser/beautician tells you about the mutual fund he is buying." (My barber sold his computer stocks and is only talking about fishing now.)

"When your dumbest relative or friend, who has never before mentioned investing, tells you he bought, or is going to buy, stock." (This one's tough, since most people don't like to talk about their mistakes.)

Does it really matter whether we get confirmation from all the anecdotal evidence above? No, not really, especially if your investment holding period is in the range of 18-24 months ideally even longer. (Much longer than the average day traderif there are any left out there.)

We contend that we are much closer to the market bottom for the NYSE Composite and Dow Jones Industrial Average than to the top, and there are outstanding opportunities for the astute, patient investor. Think PEG! (That's the PEG ratio price to earnings relative to earnings growth rate.)

Are we about to see a resurrection in the dot-coms and high p/e tech stocks? Probably not. Fits and starts of activity may create such an appearance, but sadder but wiser money is more likely to prefer companies that make moneythat have earnings.

Newer investors, including money managers that learned how abruptly momentum investing can turn on them, will not go in a straight path from despair to euphoria. It takes time to accept the reality of what has happened and what they can do to avoid future mistakes.

Each new generation of investors has to learn the lesson of investment fallibility, so don't look for a screaming return soon to the lofty NASDAQ peak of 1999.

And don't forget to check with your barber.

(Clark Davis is a 30-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money management company. Questions or comments can be directed to him by mail via the Business Journal, 313 Park Central West, 65806 or by e-mail at sbj@sbj.net.)