Thursday, February 17, 2005

KISS--BUY STOCKS!

I started to make the title BUY SSS. I had second thoughts when I realized someone out there might mistake the title as a recommendation to buy Sovereign Self Storage. Actually SSS was to stand for Success of Social Security reform. Bush has shown that he will make the compromises necessary to pass a reform plan. Yesterday, he said he would even consider an increase in the payroll tax for those who are paying $90,000 or more per year. With this kind of backing from the President, it will only take a few democratic votes to pass reform. Deals will have to be made but success is a matter of time. When the market gets a small whiff of the smell of success, market momentum will take over.

Right now, social security funds are invested in low rate treasury bonds. After reform, a portion of these funds will be re-invested in stocks. For 4 years, Americans have been adverse to buying stocks. Six years ago, Americans were willing to buy stocks yielding 2.5% while bonds were paying 7%. Yes, some folks have purchased stocks after the bursting of the bubble but the net purchases have been zero or less. This situation has caused bonds to be over-priced and stocks to be under-priced. Markets always correct, revert to the mean or what ever you want to call it. The bottom line is that stocks must appreciate, bonds must depreciate or we have to have a recession in the months ahead. Our economy is strong, leaving the probability that stocks will appreciate and bonds will depreciate.

In the final title, I chose to include the word KISS. KISS is the short hand for Keep It Simple Stupid. This philosophy was developed by William Ockham. William was a 14th century Franciscan Monk. He found that the simple answer is usually the best answer. He summed up his philosophy with the words, "What can be done with fewer assumptions is done in vain with more."

Investors have the bad habit of trying too hard. They try to understand every detail of the market. Countless hours are spent studying complex topics such as the relative value of currencies. I frequently read articles by "experts" who make investment recommendations based on their perceived knowledge about relative currency values. More likely than not the rational is upside down and backwards. I suggest investors would do well to keep their investment philosophy and execution simple.

When stocks pay a higher earnings yield than the government pays on bonds, buy stocks. When the government pays more, buy bonds. In 2005, the average big stock will pay about 6%. The historical average is much higher than 6% but right now that is all you can get. Ten year government bonds currently pay 4.1%. The historical average is higher but right now all you can get is 4.1%. What little logic that I have says that 6% beats 4.1%.

KISS--BUY STOCKS!

2 comments:

job opportunitya said...

Captivating blog. I love surfing the web for the
type of blogs that you do. It had me on the edge of my
seat and I kept going back to again and again!
Check out my plastic surgery michigan blog, please!

cash advance minneapolis said...

Exciting blog. Your site was amazing and will be
back again! I never get tired of looking for blogs
just like this one.
I'm looking at the possibility of checking your cash advance baltimore blog.