Small Fish Taking the Bait

I was chatting with one of my investment pallys yesterday and he sounded skeptical of all the optimism we’re seeing in the economic headlines. It’s always nice to have one’s view echoed.

In particular, this fellow, who had a career as a broker, was wary that so much news seemed to be aimed at convincing the retail investor to get back into the markets. (Retail Investors are the common folk, the small fish, like most of us)

When the big players are nearly out of tricks to make their numbers keep rising, it is a standard tactic to start pumping and touting to draw new money into the game. The big players need somebody to sell to in order to realize the paper profits they’ve built.

Since 2008, ordinary folks have had their money parked outside the stock markets. Because the initial wave of collapse saw something around half their portfolio wiped out. But now the markets (DJIA) are at two-year highs. Anybody who stayed in through the trough has made pretty much all their money back. And those who got in during the trough got rich(er).

People hate to see they missed an opportunity. And the bull run of the past years still has legs, or so we want to believe. It’s not too late to get in and make back some of those losses…

The U.S. stock market shook off economic and political concerns to finish the year fitter and healthier, and mutual fund shareholders are looking at a market that seems ready to build muscle.

Diversified U.S. stock funds rose 18.6% on average in 2010, powered by a 12.4% fourth-quarter run, according to preliminary results from investment researcher Morningstar Inc.

The root problem I have with the optimism is that the markets are not the economy. Stock prices are not profits. Sure, you can make a profit trading stock. But if you are an investor, not a speculator, you’re in for the long haul and profits matter more than stock prices. Because over the long term, profits are what support stock prices.

Investors who think it is finally safe to get back into the markets must believe they know as much as the big players. They don’t. Or the retail investor has to trust the word of experts and reporters, who never have their own agenda. They do.

Then, I too have an agenda. So if you’re looking at buying into these record highs, don’t trust anybody. There are always opportunities no matter how sour the markets. And there are always risks, no matter sweet the last quarter looked from the outside.