January 18, 2009

Are you feeling lucky?

The divergence of opinions of economists and strategists about market and economic issues is truly amazing. It is the first time that I have witnessed such an opposing camps on all issues from market direction, inflation situation, recovery prospects, and market valuation. There are extreme opposing camps with nothing in between; lets recap some of these issues:

  • inflation: there is the prospect of hyperinflation due to the unprecedented spending of governments or deflation as the complete collapse of all types of demand.

  • economy: some believe that recovery will be after 2009 others say it will take few years to recover out of a depression.

  • markets: some say very cheap other say very expensive as earnings will collapse completely.

  • emerging markets: is the future as it recovers due to increase consumption by its citizens while other expecting complete collapse of paper economies.

  • US dollar: some forecast its collapse others say it will hold up as all currencies are in no better shape.

  • gold: some think it worth $6000 while others think it will be worth 500 in few months.

  • Treasuries: it is a bubble while money still pours into it. This indication alone is very intriguing to me. The treasury market is worth trillions of dollars so capital owners are institutional and large. These investors, and it seems a lot of them, are saying that 2.3% is the best return they can find for the next few years, then you should listen up.

  • and the list goes on.

One camp is right and the other got extremely wrong. So are you feeling lucky?

So what to do?

Well I have few things I am doing right now:

  1. I am adjusting my time horizon to at least 10-15 years to see recovery in equity prices to the July 2007 peak. So you have to make sure that you do not need the capital for that long.
  2. Yes equities are becoming cheap but it will be cheaper, see my post here, so I will buy in small increments and not over-commit. I will commit fully when PE ratio becomes in single digits.
  3. Fixed income offers great value and great returns right now so I will take advantage of it before I overweight equities.

In the end all these strategists and analysts are purely guessing with no idea what is going on. Investing following their advice is a quick way to losing your capital.

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