A story:
In a prior life, I worked in the former Soviet Union. Russia, to be precise. Siberia to be even more precise. One look at a world map will show you that I'm not being very precise.
At any rate, while I was in Russia, we were still just getting over the whole "Evil Empire" thing. The main decorative motif throughout the country was still the hammer and sickle. It may still be, but I confess that it has been several years since I have been in Mother Russia.
During one of the trips, I was at Novosibirsk airport with one of my Russian colleagues, a former officer in the Soviet military. There, at the end of the runway, sat a sleek silver tube with the word "Aeroflot" stenciled on the side. It was the Soviet Concorde.
My friend put his arm around me and gestured at the Concorde. "Bill, in the spirit of glasnost, I tell you this. That plane never flew."
"But, of course, it flew!" thought I. "The Soviet Concorde was one of the symbols that the U.S.S.R. was every bit as technologically advanced as the West. I remember seeing the pictures on television as it was taking off...."
"But you never actually saw it fly."
"But we never actually saw it fly," said I, impressed by the audacity of the charade. The Soviets designed a sharp-looking plane, broadcast its image around the globe. But they never actually showed the thing fly - and we assumed it could all the same. In the minds of a West scared white by the Soviet menace, this plane was a self-fulfilling prophecy. It didn't have to fly in order for us to believe that it could.
[Editor's note: Of course, the Soviet Concorde did fly. As several readers have pointed out to us, it was involved in a fatal crash at the 1973 Paris Air Show. The Tu-144 was not a technological marvel --nothing to make us quake in our boots. Still, Bill needs to track down his former colleague and ask him to clarify what he meant by "didn't fly." Maybe it means something else in Russian.]
I saw a frightening article this past week about the rush back into the markets by individual investors. Ameritrade (NASDAQ:AMTD) and Charles Schwab (NYSE:SCH) announced that the amount of trading volume has surged in the last month. Ameritrade's stock did even better, up by more than 50% in May. Granted, at a market capitalization of $3 billion, it's still a far, far cry from the heady times when it was losing gobs of money and was valued in excess of $20 billion. The second coming of the uber-bubble this is not.
And yet, what has happened over the last two months, with the sharp rally in the wake of some successful dictator whoopin' in Iraq, followed by a sudden rush back into stocks by individual investors is telling. It's telling because right at the moment when this particular stock rally started, very few commentators were all that excited about stocks over the near term.
"War worries" were all the rage, and every talking head seemed to babble on about the market hating uncertainty. Maybe that's true, but investors who seek value do not mind it so much. Once the market took off right at the moment of maximum pessimism, I read one piece of dog food that spoke of the certainty of a rally followed by a mid-April collapse in prices. Maybe they meant next April.
What's interesting is that now people are suddenly excited about the stock market, now that it is suddenly rocketing upward once again. Somehow, the stock market feels healthier than it did back in March. Which is funny because by my reckoning the market, as measured by the S&P 500, is nearly 20% more expensive than it was when folks were so down. I guess that whatever anyone says about the validity of bull or bear markets, it is certainly contagious.
Whether that's a good thing or not is something else entirely. Having watched so many people light their nest eggs on fire during the go-go bubble, I tend to view rapid gains in stock prices with some apprehension. They can be self-fulfilling prophecies. And because there are so many people who have so much riding on the market appreciating, it seems that very few folks actually look under the hood and question whether this is supportable.
Is it, in fact supportable? Bad question. Even though there is a great deal of correlation between the moves of most companies on the U.S. stock markets (i.e., it's a rare day when the major indexes move in completely different directions from one another), remember that the stock market isn't a single beast. It's the amalgamation of thousands of companies: some huge, some small, some growing, some stable, some in terminal decline. So unless you're just talking about buying an index on the market, it doesn't make a whole heck of a lot of sense to discuss whether it's overvalued or not. Companies within the market are either overvalued or they are not.
Personally, I don't really care for short-term prognostications, tending instead to look for things like -- oh, I don't know -- value, for instance. If I can find a Home Depot (NYSE:HD) trading at $20, I'm not all that concerned when it turns around, just that it will eventually. Yes, a poor economic condition impacts Home Depot. But doesn't it seem bleeding obvious that the poor economic situation is not permanent? Doesn't it seem clear that eventually things will improve? Thus far, we've exited from every single recession the country has ever been in, save the current one. It's just a matter of time.
But the matter of time shouldn't encourage folks to buy stocks just because they're going up right now. If stock market movements are the only trigger you're using to determine whether or not this is a good time (or more to the point, a good price) at which to buy equities, then you're not working on enough information at all.
You're watching the Soviet Concorde taxi around the runway and just assuming that means it can also fly. It's your money -- doesn't it make sense to do a little more homework than that?
Fool on!
Bill Mann, TMFOtter on the Fool Discussion Boards
Bill Mann used to "update" his baseball cards by writing in statistics. Didn't really help the resale value. He owns shares of Home Depot. The Motley Fool is investors writing for investors.
