The Cases for and Against Buying Stocks

No one knows where stocks are heading. You don't. I don't. Warren Buffett doesn't. Peter Schiff doesn't. No one does.           

Even so, there's no shortage of market forecasters doling out rationales both for and against being in stocks right now. One side's screaming bloody murder, the other's screaming opportunity of a lifetime.

Who's right? Both sides make persuasive arguments, and you could probably do worse than weighing each point of view with an open, unbiased, head before making any big investment decisions. Here are a few key arguments from both sides.

The case against buying stocks

  • Credit is still a mess
    So far, the financial industry has written off around $1 trillion in losses. That might sound like big bucks (and it is), but some of the more reputable forecasters like Nouriel Roubini predict that number could balloon as high as $3 trillion before all is said and done. Citigroup's (NYSE: C  ) recent meltdown suggests he's probably on the right track. That doesn't bode well for stocks, as there's no way the economy can start recovering until banks stop hemorrhaging.
  • Interest rate agony
    All else equal, stocks should do poorly in a rising interest rate environment, and vice versa. With the Fed funds rate hovering around zero, everything possible is being done to get credit flowing, but it also means there's only one place for interest rates to go from here: up. Factor in unprecedented government borrowing, and way, way up may be more like it.
  • Historical hysteria
    Yes, stocks have plunged, but so have earnings -- big time. How "cheap" is a stock like Yahoo! (Nasdaq: YHOO  ) at $12.50 when analysts expect it to earn all of $0.45 per share in 2009? According to Standard & Poor's, the S&P 500 still traded at 19.59 times expected earnings as of Dec. 31. Compare that to other periods of market mayhem, like 1977-1982 when stocks traded at an average 8.27 times earnings, and even a dramatic sell-off from today's levels wouldn't break many historical precedents.
  • The recover-less recovery
    Stocks could perk up on hopes of any economic recovery, but what's that really mean? Recovering back to the days of a subprime, home equity-fueled, credit card driven society? Back to the days when the housing bubble unsustainably employed hundreds of thousands of people? Of course not. The new economy will ultimately be smaller, less leveraged, and much less driven by consumer spending than the one we enjoyed before. Realizing that part of the past decade was as fake as fake gets is a tough reality to swallow.

The case for buying stocks                                                                           

  • Redefine "stocks"
    As Charlie Munger once said, "To me, it's obvious that the winner has to be very selective ... I don't know why it's not obvious to very many other people." So while broad stock indices might be in for more misery, unbelievable opportunities are forming for selective investors. The short-term turbulence we've seen in many stocks, ranging from hard-hit financial Goldman Sachs (NYSE: GS  ) to bland Berkshire Hathaway (NYSE: BRK-B  ) , shows how an edgy market can let you get into stocks at incredible prices. A handful of stocks are now trading below their net-cash levels. Opportunity is aplenty; it's just a matter of where to find it.
  • There's blood in the streets
    Almost by definition, stocks bottom out when the last investor standing throws in the towel and calls it quits. Whether we've reached that point or not is anyone's guess, but there are signs we've been close: The VIX volatility index nearly doubled its historical highs in October and then touched those levels again in late November -- on the same day stocks like Chesapeake Energy (NYSE: CHK  ) , Freeport McMoRan (NYSE: FCX  ) , and General Electric (NYSE: GE  ) saw their shares collapse. Maybe November wasn't the bottom -- after all, Freeport set new lows a couple weeks after that -- but, when the bottom does come, it'll look a heckuva lot like it did then.
  • Markets look ahead
    When did the biggest three-year stock rally in history begin? March 1933 -- smack in the middle of the Great Depression. In fact, stocks bottomed out in 1932 and went on to quadruple over the following four years. This highlights two points: Stocks can way overshoot on the way down, and market's look ahead, moving well before the economy does. If the assumption is that the economy will start to gain traction in 2010, there's a good chance a sizeable rally will take place sometime in 2009.
  • Plenty of ammunition on the sidelines
    As of the end of 2008, there was some $8.9 trillion in cash sitting around in banks and money market funds -- the highest in almost 20 years. The amount of cash on the sidelines represents a staggering 74% of stocks' market value. And why are Treasury bills yielding next to nothing? Because cash is flocking there in droves. One thing is for sure: When the fear of market meltdown subsides and investors regain an appetite for risk (which will happen), there's an absurd amount of cash waiting to be put back in the market.

There you have it, Fools. Two opinions that'll lead to two very different outcomes. What's your take on it all? Feel free to forecast your heart out in the comment section below.

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Fool contributor Morgan Housel owns shares of Berkshire Hathaway. Chesapeake Energy and Berkshire Hathaway are Motley Fool Inside Value selections. Berkshire Hathaway is a Motley Fool Stock Advisor pick. The Fool owns shares of Berkshire Hathaway, and has a disclosure policy.$8.9 trillion in cash on sidelines.


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  • Report this Comment On January 15, 2009, at 5:21 PM, jettrey wrote:

    One of my graduate professors, very sharp guy, had us read "A Random Walk Down Wall Street", gave the most accurate market predictions I've ever heard. He'd say "The stock market will go up..... it will also go down."

    All kidding aside, he also gave some semi-humorous advice that I wish I'd followed more often than I have. He said if you're debating about whether or not to sell a stock, then just sell half. If it goes up, you be glad you kept some of it. If it goes down, you'll be glad you sold half of it.

    Guess it just goes to show, no matter how much we crunch the numbers, a big part of investing is still emotional.

  • Report this Comment On January 16, 2009, at 12:37 AM, trenton1ryan wrote:

    < Factor in unprecedented government borrowing, and way, way up may be more like it.>

    <The new economy will ultimately be smaller, less leveraged, and much less driven by consumer spending than the one we enjoyed before. Realizing that part of the past decade was as fake as fake gets is a tough reality to swallow.>

    The two above weigh the most at this point in time imo.

    Two more factors we'll have to deal with before a full recovery can take place:

    1) Consumers defaulting on CC's due to continuing rising unemployment and housing still slumping,

    and

    2) Inflation will rear its ugly head again, with oil/gold/silver/prices rising again, probably in tandem with a rise in interest rates.

    There is much more pain ahead my friends. If you're gambling in the market now, either day trade it or be ready to wait 10 years or so. This drama is still unfolding.

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