Wednesday, May 18, 2005

The Capital Spectator: WITHERING HEIGHTS

The idea that deflation is the predominant risk is crawling through the blog world. Bill Gross of Pimco gets wide distribution and he now calls for a 10 year rate of 3% within five years. If his call had been within 6 years, I would say his call is better than a 50/50 proposition. Professor Jeremy Siegel forecast disinflation because of massive retirements. Again, the average boomer is only 53 years of age. Professor Siegel might have a point in 5 or ten years.

My point continues to be that traders, economist, investors, academia and consumers are confused. Inflation is the scare one day and deflation the next but fear is present. "Fear and Greed drive the market; buy Fear sell Greed!" (Thank you Warren Buffett!)

The situation is that the world economy is experiencing strong growth and strong productivity growth. Naturally strong growth leads to strong demand for commodities. The ability of buyers to select from low cost producers and the strong productivity growth are powerful dis-inflationary forces. Productivity in India and China have been incredible. If an Indian or Chinese company buys copper for double the price and makes a product with labor cost at a 15% discount to the rest of the world, the final product cost less on average! The bottom line is that investors just do not realize how sweet it is! (Many thanks to Art Carney and Jackie Gleason)

A fundamental rule for making money in the stock market is to stay in the stock market!

Confused folks are likely to buy at the wrong time and sell at the wrong time. Stocks have historically returned 11 to 14% over long periods of time. Most folks try to get out and in too often and no one seems to be very good at getting out or in at the right time. Making 11 to 14% over long periods of time will turn a small nest egg into a large fortune.

Many of the greatest investors of all time have totally ignored economics and the business cycle. People such as Bill Miller stay invested all the time in the stocks they believe are the best values. (This manager of Legg Mason Value Trust has beaten the S&P 500 14 years in a row despite a drag of almost 2%!)

I love economics, I enjoy understanding how the economy works, however, I believe the best investment strategies have little to do with economics. One of the keys to making money is to buy when most people are afraid to buy. A recent Gallup poll shows that Americans as a group currently have a very low opinion of the stock market and the economy. Buy Stocks.

Buy the Big Bull Boom Bubble Before the Frogs Boil!