Yesterday, my fellow Fool Rich Smith presented a survey from insurer Prudential (NYSE: PRU). In short, the data showed that roughly three-quarters of the investors polled said that they had no plans to invest in the stock market any time soon. Rich concluded:
The results don't bode well for any of these asset managers -- or for small investors like you and me, who stand to lose money as our fellow Americans lose confidence in stocks.
While I agree that this could be a result over the short run, I think that the research reveals a much ... well, frankly, a much sadder picture.
The idea of individual investors losing a lot of money in the stock market is nothing new. Regular Joes regarding the stock market with a wary eye is nothing new. And unfortunately, watching individual investors who had formerly sworn off stocks pile back in at exactly the wrong time would also be nothing new.
Buy high and sell low!
Back in 1999, investors were paying as much as 61 times earnings for Wal-Mart's (NYSE: WMT) stock. Now it fetches less than 13 times earnings. What the heck went wrong? The company's return on equity is essentially the same as it was in 1999, profit-per-share has more than quadrupled, and it's grown its dividend more than sevenfold.
And what of Intel (Nasdaq: INTC)? For part of 2000, you had to be willing to pay nearly 70 times earnings for the stock, while today its shares can be had for just 10 times earnings. As compared to 2000, over the past 12 months, Intel's return on capital is better, its margins are fatter, and its balance sheet is basically just as strong.
And now is when investors are complaining about stocks?
Is it different this time?
Unfortunately, I don't think it is. Investors will continue to hate stocks for a while -- maybe a somewhat longer while, given how violent the last downturn was -- but they'll eventually start dipping their toes back in. By that point, the market as a whole may have run up even further, and they'll suddenly feel rushed -- "If I don't get in now, I'll miss out!" Wal-Mart, Intel, and all of the other stocks selling at bargain prices today will no longer be bargains, but they'll be bought anyway.
And eventually, for one reason or another, the excitement to get in will reverse into a stampede to get back out, and once again individual investors will feel burned and start cursing stocks.
How do you avoid playing a role in this repetitive drama? It's not just about "buy now" or "don't buy later." It's a matter of recognizing the market for what it is -- it's not a casino, and it's not rigged. It's just a giant marketplace where prices get whipped around by the wild emotions of its participants.
Recognize the role that emotions play in the marketplace and the role they play in your own investing, and you may stand a chance of not getting swept up in the next breathtaking performance of "How to Lose Big by Investing in Stocks."
