Nobody is Buying Stocks?

“One of the funny things about the stock market is that every time one person buys, another sells, and both think they are astute.” – William Feather.

As stock prices have declined this week, I have noticed some sloppy journalism. According to newspapers and TV programs, there is so much pessimism about the economy that no one is buying stocks. Clearly if everyone else is selling, you would be foolish to be a buyer.

To get a sense of this interpretation, take a look at today’s New York Times article Slump Humbling Blue-Chip Stocks, Once Dow’s Pride by Jack Healy.

Here are some relevant quotes with my comments:

“With so much uncertainty, investors are parachuting out of companies like banks, retailers and utilities, and abandoning stock markets everywhere from Asia to Europe to Wall Street.” (Parachuting? Nice metaphor.)

“No one is taking a back-seat approach. Everyone is just selling.” – Peter I. Cardillo, chief market economist at Avalon Partners.  (Everyone?)

“Nobody wants to be invested, that’s the problem. I don’t believe we’re at the bottom yet.” – Eric Ross, director of research at the brokerage firm Canaccord Adams. (Nobody?)

A similar story was portrayed in an article in the Wall Street Journal, Stocks Hit ‘97 Level, Signaling Long Slump, on March 3, 2009 by Tom Lauricella and Annelena Lobb.

Here are a few quotes with my comments.

“It’s like an unending nightmare” – Kent Engelke, managing director at Capital Securities Management . (This is an exaggeration and seems to suggest prices will continue to drop.)

“The relentless decline is pushing investors to the sidelines.” (Not really. See explanation below.)

“I want to wait for a firm turnaround, and be as safe as possible,” Bijon Mishras, a financial-services consultant in New York. (Whoa, Nelly. Remember this quote and see how it turns out.)

“Nobody wants to buy a market today that they think is going to be down 2 or 3% tomorrow,” says Michael O’Rourke, chief market strategist at brokerage firm BTIG LLC. (Nobody?)

A Reality Check

Yes, the economic news coming out of everywhere is very bad, and yes, stock prices have had steep declines. But guess what? Every single time that someone sells a stock position, someone is on the other side of that transaction. Every single time. What do we call such a person? Insane? No. How about “buyer.” Sellers and buyers must be equal!

For every person who sells because he or she doesn’t like the prospects for the future (a.k.a a “pessimist”), there is someone who is buying (a.k.a. an “optimist”). That person thinks the investment is at a great price. Those two groups of investors or participants in the market have to be in equilibrium at all times.

When you look at it from that perspective, you don’t get the overwhelming sense of doom that the media creates — that there’s only one way for prices to go, and that is down. If that really is the case, then there are a lot of crazy people who are buying now.  I don’t think so.

The fact that prices have been going down does not mean that they will continue to go down. Just as in 1999, the fact that prices had been going up did not mean that it was a good time to buy stocks.

Risk/Reward

No one knows what tomorrow will bring, but unless capitalism ceases to function, stockholders will be rewarded in the long term for owning stocks and for taking risks. Yes, there is risk in owning stocks, as we have recently experienced. Since we’ve already seen the risk, how about staying around for the reward?

An old Wall Street proverb is that “Nobody rings a bell at the top or the bottom of a market.”

Are you waiting for that bell to ring? Don’t.