by Mark Neil

People are getting excited about the stock market again.  They are opening their monthly statements, checking out their 401k balances at work and beginning to feel they may have a financial future after all.  Since the middle of March the markets have been going up, and in a pretty impressive fashion.  They have paused along the way a couple of times, but not for very long.  Already this year the Nasdq and the Dow Jones Industrial Average have posted returns that we thought were gone for good.  

I used to think there were two emotions that fueled the financial markets. I thought greed was the emotion that made markets go up and fear made them go down.   If you look at the history of the stock market you can find economic reasons why the markets went up or down.  Our government has the power to stimulate the economy through its budgetary or monetary processes and they can also influence spending through the tax structure.  But in order for those systems to work they must have human emotion behind them.  

A rocky road.

Fear is the emotion we have had plenty of experience with in the last few years.  Because of the 9/11 disaster we now see how vulnerable our economy can be.  The transportation and insurance industries were dealt significant blows that will have an economic impact on us for many, many years.  Even before 9/11 though investors were leaving the stock market in droves over fear that their retirement savings would suffer even greater losses.  

Greed was the spark that ignited the amazing advance in the stock market in 1998 and 1999.  What else could possibly explain the rationale behind spending $120 per share for a company that consisted of two guys, a couple of computers, a website and idea that now is so absurd it is frightening!   

Greed may have been the catalyst for the “irrational exuberance” of the late 90’s, but the emotion that I believe is more powerful than greed is hope.  Greed in the hands of powerful people can be awesome, but few people in the masses have that kind of driving force behind them.  They are visible in the media, and often times they are admired for their passion and persistence, but for an idea to work it has to have the support of the masses behind it.

The little train that thinks it can.

That is where hope comes in.  

Most people do have a modest amount of greed within them.  It’s quite normal and may be the spark that instigates the action.  Hope however is more enduring.  It can carry people, ordinary people, for long periods of time.  Hope enables them to endure prolong hardship and amazing amounts of suffering, all with the expectation that there is a light at the end of the tunnel.  

Without hope, how could the gaming industry possibly exist?  Not only does it exist, but it thrives in areas and economies that have been stagnant for years.  Give someone a reason to hope and they will stay the course long after fear and greed have disappeared.  

Wishing doesn't make it so.

So what does this have to do with investments and today’s economy?  Simple.  People are returning to the market because they have hope.  They are hoping that this is the rally they have been waiting three long years for.  The experts…you remember them don’t you, the same people who predicted positive returns in 2000, 2001 and 2002.. are again looking for the economy to rebound in the third and fourth quarter.  People are jumping on the bandwagon and “hoping” to get in on the ground floor.  

Investors are jumping aboard a train that I call the “Hope Express.”  They think this is the train that is going to get their retirement plans right back on track.  They are jumping on board now and buying up tech stocks because they don’t want to get left behind this time around.

There is an old axiom in the investment business that goes something like this: “When everyone else is hopeful, you should be fearful and when everyone else is fearful, you should be hopeful.”

Traditional values are important.

I don’t see enough fear right now.  This is not a time to be bold and greedy.  There are too many signs that this market is still overvalued.  Even after a wicked three-year bear market, this market is still expensive.  

Recently Barron’s Magazine reported, “in 1982, stocks sold at 7.9 times earnings, yielded 6.3%, were priced at less than one times book value and one-third of sales. Currently, by contrast, stocks sell at 28 times earnings, yield 2%, are priced at 2.75 times book and 1.3 times sales. In other words, this market is anything but cheap by any standard of valuation. As a matter of fact, as we've noted before, those incredibly rich multiples smack more of bull-market tops than of bear-market bottoms.”

The well-advised investor should maintain a fearful attitude about this market.  If they venture forward they need to maintain a very balanced and well-diversified portfolio that will take advantage of all types of markets.  One of the secrets of creating wealth is to avoid loss of principal.  That has been extremely difficult to do in these last 3 years, but it is a goal investors must never lose sight of.   With a strategy of wealth preservation the average investor can board the “Hope Express” and have a very safe and profitable ride. 

Contact Mark Neil at:
Northwest Wealth Advisors, Inc 
0605 SW Taylors Ferry Road
Portland, OR 97219
Office: (503) 478-6632 
Fax: (503) 595-1863 
Email: mneil@nwwealtadvisors.com 

© 2003 Mark Neil