March 28, 1998 in Nation/World

For Investors, Always Time To Buy Preparing For Phantom Corrections A Sure Way To Lose Money

James K. Glassman The Washington Post

Lately, readers have been asking whether it’s time to sell. No wonder they’re worried.

From Jan. 12 to March 24, a space of just 12 weeks, the Dow Jones industrial average rose 17 percent. For the year, Pfizer Inc. is up 28 percent; Ford Motor Co., 31 percent; Fidelity Select Telecommunications Fund, 29 percent.

Why not simply take a breather? You’re not greedy. With the market this high, it’s bound to fall and you can buy back later, right?

Wrong. There may be reasons occasionally to sell stocks, but the overvaluation of the stock market - alleged or actual - is not one of them. I’ll get to the right reasons for selling below, but first a tougher question than whether to sell: whether to buy.

The date was May 28, 1995. The place was this very column. “With the market up 20 percent in the past 12 months and acting giddy at such a high altitude,” we asked if this might not be a good time to wait - rather than purchase more shares of stock. Our suggestion: Buy.

At the time the Dow Jones industrial average stood at 4,369. Since then, with dividends included, it has returned 112 percent.

The purpose of this little vignette, as the Rev. Jesse Jackson might say, is not self-congratulation, but reader education. The answer to the buy-or-wait question is always to buy - as long as you are a long-term investor in stocks. And if you aren’t a long-term investor (minimum seven years), then what are you doing in the stock market in the first place?

The question arises again and again. At almost every point in stock market history, investors wonder, “Is the market too high for me to buy?” Or, conversely, if it has dropped, “Should I wait until it hits bottom?” The reasons to avoid investing in stocks are multiple and persuasive: Inflation is returning, earnings are coming down, oil is getting more expensive, dividends are too low, etc., etc.

Lined up against these is only a single powerful argument: history. Over time, the value of stocks rises because the underlying businesses increase their profits. Research shows that over the past 72 years, stocks have returned an annual average of 11 percent. If you had invested $1,000 in a basket of large-cap stocks in 1926, you would have $6 million today.

There’s another good argument as well: Trying to guess the high point of the stock market is an impossible task. The best investors don’t try. Like the great Benjamin Graham, their aim is to find wonderful businesses in which they can become a partner at a decent price. That’s a tough enough task in itself.

But small investors are continually tempted to dart in and out of stocks - encouraged, at least in part, by reporting on television and in newspapers that stresses the judgment of analysts about the appropriate level of the market. This is pernicious - but, alas, influential - nonsense.

As Peter Lynch, former manager of the Fidelity Magellan Fund, put it, “Far more money has been lost by investors preparing for corrections than has been lost in the corrections themselves.”

Dalbar Inc., a Boston research firm, has proven this proposition by using its computers to simulate the real-life returns that investors have gleaned over the past 12 years and comparing them with the returns they would have gotten if they had simply stayed in the stock market with a diversified portfolio of mutual funds over the whole period. Actual-investor returns were just one-fourth of market returns. Why? Because investors sell and buy at the wrong times, rather than simply holding.

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