Getting to the bottom of when it's safe to invest again
The clamour of voices predicting that the stock market has bottomed out is turning into a roar. Even US President Barack Obama has joined the fray, saying investors are 'starting to get to the point where buying stocks is potentially a good deal'.
The politically savvy president is not alone: the bottom of the market is being called by one of America's most august value investors, Jeremy Graham; by one of the world's biggest fund managers, Anthony Bolton of Fidelity Investments (actually, for the second time); and by Mark Mobius, the emerging markets guru at Templeton.
And then there is Warren Buffett, who has stopped trawling the world for investment opportunities because he believes the American market has reached a low where great bargains are to be found. To use the more colourful terminology he employed to describe his enthusiasm for shares in the market depression of 1974, he felt 'like an oversexed guy in a whorehouse'.
Having just completed the revision of a book on stock market panics, I find that the one thing practically everyone wants to talk about is when, exactly, the market will bottom out. I hate to be a party pooper, but my answer invariably is that not only is the question wrong, but spending time worrying about it is misguided.
Anyone who claims an ability to pinpoint market lows - or highs, for that matter - probably had a previous incarnation as a snake oil salesman, because precision in this matter is illusive. And while waiting to identify these illusive moments, investors invariably hang on in rising markets until after the bubble bursts, and in falling markets because they are so mesmerised by fears of further falls that they only get in once prices are well into their upward stride.
Nathan Rothschild, one of history's most famous investors, modestly said: 'I never buy at the bottom and I always sell too soon.'
In other words, he did not spend his time wondering where optimum opportunities were to be found but was more interested in general trends. Fortunately, the history of stock market panics and stock investment offers remarkably consistent guidance on this matter. For a start, the record shows that, in the past 100 years, all the biggest gains on stock markets came during the depths of crises. This implies very substantial opportunities for wily, short-term traders.
Second, in the longer run, global stock markets have a consistent record of tracking movements in New York. There are, of course, moments of departure but this is unmistakably the long-term trend, so value investors really need to stay focused on what happens in America.
Third, even though the usual indications of good value, such as low price-earnings ratios and high yields, emerge quite quickly in the depths of a crisis, they are not the real indicators of when the most timid investor should contemplate snapping up bargains.
The key indicator is diminished volatility. It is astonishing to see how quickly investors come to accept wild gyrations in share prices. In normal times, a market that moves one or two percentage points per day is considered to be reasonably volatile. However, in times like these, a one-day market movement of, say, 5 per cent barely raises an eyebrow.
Yet, make no mistake, a movement of this kind represents extreme volatility. When that volatility lessens, investors need to pay careful attention because it suggests that more normal conditions are about to return. In these circumstances, bargain hunters will definitely have missed the bottom of the market - but they will also have missed the many dead-cat bounces.
The biggest lesson from history, however, is that no investment class has proved, over time, to be as lucrative, flexible or tradeable as equities. Therefore, while other forms of investment may enjoy momentary popularity, they are no substitute for a heavy portfolio weighting in stocks.
Stephen Vines is author of Market Panic: Wild Gyrations, Risks and Opportunities in Stock Markets
It is pointless to try to pinpoint market lows and highs. Nobody can do it, so don't bother
Stay focused on what happens in America. In the longer run, global stock markets track movements in New York
Though the usual indications of good value such as low PE and high yield emerge quickly in a crisis, they are not the real indicators of when a timid investor should start buying
The key indicator is diminished volatility. When that happens, pay attention because things may be getting better