I saw this headline the other day: "Investors Decide to Run With the Bulls: With Economy Shaky, Some Analysts Whisper 'Irrational Exuberance.'"
All I could do was chuckle at the fact that anyone would use the phrase "irrational exuberance" in connection with a market that's still down over the past 12 months and off 21% the last two years. That phrase reminds most of us of the top of a bubble before it pops and the market loses half its value.
The S&P 500 has jumped 25% off its March low, but is still up only 10% year-to-date.
Yet, when you combine that spike with valuation concerns and the assumption that "small investors" have fueled much of the rise, it drives some folks downright crazy. Like University of Texas professor Henry T.C. Hu, who told The Washington Post in that same Exuberance article, "The kind of mystical belief in stocks that people had in the late 1990s through early 2000 really hasn't gone away... It's quite distressing to me that people still refuse to let go of this religion."
I, too, am distressed, but for a different reason. When stocks recover some of their significant bear-market losses and "analysts whisper irrational exuberance," what subtle messages are they sending?
1. You can time the market.
Don't get me wrong; worrying about whether the market is too high or too low has its place. But it's extremely hard to make much use of all that fretting because of the near impossibility of being able to time the market.
Now, God bless all the friends and Fools and analysts who were telling me that the market was too high in 1999. If I'd listened to them, I could have sold everything and I'd be a lot better off today. Of course, I heard the same bearish remarks the year before that, and before that, and before that. It may have been from different analysts and different friends, but I can't remember a year when there weren't a significant number of people telling me the market was overvalued and due for a fall.
While definitely making note of the ones who were right in 1999 (Hi, Rimpy!), I'm not going to drop everything and start following their market-timing advice. There's too many of them, for one thing, and they never all agree. There are always concerns about valuation; there will never be a consensus on an undervalued market.
But most important, there's no one around who can consistently and successfully time the market. I'll not trot out the famous John Bogle quote here about him never knowing anyone who's been successful at it in his 50 years in the business, but just know that it simply cannot be done.
2. All stocks move in concert.
A rising tide doesn't lift all boats as far as the stock market is concerned, and neither do all boats sink during an ebb tide. I can't say it clearer or more concisely than Bill Mann, so I'll just quote from his recent article:
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.
It's perfectly valid to discuss the valuation of Cisco (NASDAQ:CSCO) and IBM (NYSE:IBM), of Pfizer (NYSE:PFE) and Merck (NYSE:MRK). But the total market is a different issue entirely.
3. Small investors are clueless.
A lot of the angst over the market's rise stems from the fact that individual investors are taking part in the rally. Although stock mutual funds still have about $1 billion less in them today than at the beginning of the year, more than $1.5 billion has flowed into these funds this month, according to the Post. Because of research that suggests such inflows and outflows can be used as contrarian indicators, many are ready to call us individuals clueless and predict dangerous times ahead.
But here's the problem with that line of thinking: If such a method really worked, then we'd have a successful, mechanical method of timing the market. And, well, if you weren't paying attention earlier, you can't time the market. Mutual fund inflows and outflows can be used as one cog in your information toolbox if you're so inclined, but if it's the only thing you use to decide whether the market's heading down or up, you're in trouble.
Besides, not all individuals are clueless. Heck, some of my best friends are individuals.
Stick to your guns
Am I saying that all the folks who believe the current rally is unsustainable are wrong? Not at all. I think the "irrational exuberance" talk is way off base, but the market may indeed head lower again for a while. But there's just as much of a chance it will stay near this level or head higher for a while. I don't know for sure, and neither does anyone else.
I do know that if you're jumping into the market now solely because of the rally, you're making a mistake. If you try to use rallies and dips as market-timing tools, you'll miss all the rallies and get caught in all the dips and lose your money very quickly.
But if you're already in the market, don't be selling out because of such exuberance talk. Don't be holding back on your planned 401(k) or IRA or Drip contributions. Know that you'll be involved in plenty of rallies and plenty of dips in your investing career. Stick to your guns, and realize that the odds are stacked heavily in your favor that you'll be better off 10, 20, and 30 years from now because you did.
Rex Moore likes to stick and drip, and he'll be feeding his 401(k) in a calmly exuberant fashion for years to come. At press time, he owned no shares of the companies mentioned in this article. The Fool has a disclosure policy.
