What if the market staged an historic rally and nobody came?
Turns out that's not exactly a "what if" question. According to data from the Investment Company Institute -- the fund industry's official keeper of facts and figures -- investors yanked some $18.9 billion dollars out of equity mutual funds between March 2009 and the end of the year. Over that period, the Dow shot up by 54.4%, a gain that would have increased that $18.9 billion to roughly $29.2 billion.
If you're among those who remained in the market, pat yourself on the back and treat yourself to a whole litter of Zhu Zhu pets. You've earned the right to splurge. If not: What the heck is wrong with you people?
Joking!
Well, kind of. When it comes to investing, patience isn't just a virtue; it's an absolute necessity. Still, there's no cause for alarm. The rally's easy, "dartboard" money has already been made, but the case for selective stock investing remains as strong as ever. If anything, the market's meteoric rise makes that case even stronger.
That rise, after all, has been predicated on robust economic health. Unemployment remains in double-digit territory, and consumer spending in this, the most consumption-based of economies, has been correspondingly underwhelming.
Instead, as I read it, the rally seems predicated mainly on two things: 1) The financial apocalypse didn't occur, as many folks thought it might back in the dark days of February; and 2) As a result, the market in the aggregate was grossly oversold. Indeed, between October 2008 -- which is when the market bubble began to deflate -- and February 2009, the basket of 30 blue-chip companies that comprise the Dow shed nearly 35% of its value.
Paging Sir Isaac Newton
As with physics, so with finance: Beginning in March, the Dow enjoyed an equal and opposite reaction -- a return-to-greed feeding frenzy, one that's lofted the index to a price-to-earnings multiple that hovers near where we were around the time the latest bubble burst.
Indeed, at that peak in 2007, the Dow -- home to household names like Intel (NASDAQ:INTC) and Bank of America (NYSE:BAC) -- traded with a P/E of 16.42. At the close of 2009, the Dow ran with a P/E of 16.69, thanks in part to Intel and Bank of America, two of the index's priciest pieces as gauged by their P/Es.
That's hardly a sure sign that unhappy days are here again. Still, for folks who missed out on the recent rally -- or for those who may have benefited from the run-up but now have valuation concerns -- it should be a warning sign: Even if the market doesn't correct in a major way, opportunity costs can be substantial for those who hang on to stocks once they've realized their upside potential -- and then some.
Investors, after all, eventually cycle back to where the market's bargains are. And given how broad-based the rally has been, we all likely own a couple of stocks or five that ain't exactly bargains. Indeed, for the year to date, all but two Dow components -- ExxonMobil (NYSE:XOM) and Wal-Mart (NYSE:WMT) -- are in the green. And some members of the index have been positively verdant: IBM (NYSE:IBM) and Microsoft (NASDAQ:MSFT) are both up around 60% on the year, for example, while boring old American Express (NYSE:AXP) has delivered a triple-digit rocket shot.
Who'd a-thunk it? Well ...
Two of those three companies -- American Express and Microsoft -- are longtime recommendations of the Fool's Inside Value, a service whose members -- unlike all too many fund investors, alas -- were able to enjoy every last drop of the recent rally. Sensitive to opportunity costs, Inside Value's honchos don't rate either concern a Best Buy Now. Seven other companies do make that cut, though, thanks in large part to stock prices that reflect discounts of up to 40% below intrinsic value. They trade below the specific buy below guidance that Inside Value also provides.
You can check out the entire list of recommendations -- for free -- by clicking here. Inside Value is where the Fool's bargains are, and true to the service's cheapskate mandate, a 30-day guest pass is yours for the mere clicking.
Shannon Zimmerman runs point on the Fool's Duke Street and Ready Made Millionaire services, and he runs off at the mouth each week on Motley Fool Money, the Fool's fast 'n' furious podcast. Shannon doesn't own any of the stocks mentioned. You can check out the Fool's strict disclosure policy right here.
