Respecting Values
Thursday, August 10th, 2006
By Michael Lombardi, MBA for Profit Confidential
When you’ve been an investor as long as I’ve been, you see all kinds of cycles. You see high interest rates (early 1980s) and you see low interest rates (2004). Bear stock markets end (1974) and bull stock markets end (1999). Oil prices collapse (1986) and oil prices boom (today).
As a long-term investor, the best you can do is respect value. At different times, different forms of investment are either overvalued or undervalued. Our goal should not be to follow the herd mentality, but to simply follow boring common sense.
Early in the 1980s interest rates reached ridiculously high levels and home owners were dropping off their house keys at the bank and walking away. It looked like interest rates would never fall. But by the summer of 2004, rates fell to their lowest level in about half a century.
In 1974, no one wanted to buy stocks. The market was simply dead. No buyers. By the end of 1999, the greatest stock market rally in history finished its bull cycle. In 1999, one could say, the stock market had buyers and no sellers.
In Texas, in the mid 1980s, oil prices fell to $13 U.S. a barrel. Texans felt their world caving in. Oil companies were closing their operations daily. Many jobs were lost. Twenty years later, oil is trading near $80 U.S. a barrel and oil companies are making money hand over fist again.
Investments, by nature, either become excessively overvalued or undervalued before they start a new price trend. And that brings me to my message of today.
In my opinion, stocks, after an unprecedented bull market that ended in 1999, to which valuations were extremely excessive, never started a price cycle towards undervaluation. Yes, one could argue stocks have stayed at about the same price level for about six years. But bull markets (that bring excess valuation) are followed by bear markets (that under value the market). That hasn’t happened yet. And that’s why my bet is that lower stock prices lie ahead… likely lower than anyone can imagine today.
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Tags: interest rates, oil prices, stock market, stock market rally
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Michael bought his first stock when he was 17 years old. He quickly saw $2,000 of savings from summer jobs turn into $1,000. Determined not to lose money again on a stock, Michael started researching the market intensely, reading every book he could find on the topic and taking every course he could afford. It didn’t take long for Michael to start making money with stocks, and that led Michael to launch a newsletter on the stock market. Today, Michael only employs the top market analysts and editors. Some of our recommendations have posted gains in excess of 500%! Michael has authored and published over one thousand articles on investment and money management. Along the way to building Lombardi Publishing Corporation, now with over one million customers in 141 countries, Michael became an active investor in real estate, art, precious metals and various businesses. Readers of the daily Profit Confidential e-letter are offered the benefit of the expertise Michael has gained in these sectors. Michael believes in successful stock picking as an important wealth accumulation tool. Married with two children, Michael received his Chartered Financial Planner designation from the Financial Planners Standards Council of Canada and his MBA from the Graduate Business School, Heriot-Watt University, Edinburgh, Scotland.Follow Michael and the latest from Profit Confidential on Twitter
