The stock market’s been very strong since the end of August. Now it’s consolidating, which is healthy. But I have to repeat my steadfast view that investment risk for equities investors remains very high in the current environment. We can’t ignore the sovereign debt issue anymore.
Investment risk is always present in equities. Stocks are secondary shares that are sold to a trading marketplace. When a stock comes to market, the owners of the business are cashing out. Equities are inherently volatile and mispriced on any given day. Anything can happen to a stock at any time even in the best of trading environments. No matter what the expectation is in the broader market, equity investors need to be prepared to get sideswiped by a corporate event or an outside catalyst.
Naturally, the level of investment risk rises the smaller the underlying business. It’s difficult to imagine that a company like Procter & Gamble (NYSE/PG) would completely collapse, but it’s never out of the question. During the stock market bubble in 1999 and 2000, P&G reported quarterly earnings that didn’t meet consensus estimates and the stock lost half its value. That was a tough pill to swallow if you were a shareholder at that time. The company didn’t all of a sudden start selling half of its usual product volume. It took years for the stock to recover and only now it is barely trading above the level it was 10 years ago.
It’s no fun thinking about risk, but investors have to keep investment risk fresh in their minds all of the time. Currently, the biggest investment risk to capital markets is the sovereign debt issue facing Europe, other countries and the U.S. The issue has the potential to be a cascading event that could easily sap global financial markets of any positive sentiment. I can’t emphasize enough just how destabilizing this issue could turn out to be. For a lot of people in this economy, the new age of austerity was abruptly imposed. And now, entire countries are facing the same imposition.
I have always operated with the attitude that, at any given time, there are very few if any attractive investment opportunities in the marketplace. My stockbroker strongly disagrees. I always ask myself, why is now the best time to buy these stocks? The fact is, it almost never is.
I’ve learned over the years that there is no bandwagon that’s worth jumping on. I like to buy low and sell high, not buy high and sell higher. From my perspective, the key to making the most money from the stock market as a speculator is to wait and watch until all the factors (corporate, monetary, investment risk, value, market sentiment, etc.) come together around the same time, and then you pounce. All the factors don’t come together very often.
I don’t know where the broader stock market is going to go over the next month. I do know that investment risk in the equity marketplace is very high. In summary, I’m in waiting-and-watching mode, getting ready to pounce on a trade that has yet to present itself.