Fight The Fear And Invest

Two weeks ago, The Kelly Letter changed from a medium-term bearish stance to a medium-term bullish stance. Since then, the market has done well:

  • Dow +5.4%
  • S&P; 500 +5.0%
  • Nasdaq +4.1%

The letter’s permanent portfolios have done even better:

  • The Dow One +18.2%
  • Double The Dow +10.6%
  • Maximum Midcap +6.3%

Now, people are wondering if they’ve missed their chance to get in the bull market. This note from Hank is typical:

Your change from cautious to bullish in the middle of the housing collapse and sub-prime debacle looked reckless to me. Then the market rose that first week and I thought I’d wait for a correction to get in, but last week was the best in 2007 so far.

But I’m still queasy. Jon Markman — who is a proven market genius — wrote on Friday that we’re on the verge of a bear market of epic proportions. Housing data came in bad again last week. Oil is at a record high price. And on and on.

You need to be careful, Jason. This isn’t a game. It’s people’s money on the line and you shouldn’t tell them it’s OK until there’s no reason to fear.

With all that in mind, when do you think will be a better time to start?

I’ve never in my career seen a market free of fear. Never. People who’ve been in the business longer than I will tell you the same thing. There’s always a reason to gripe, worry, and fret, yet the market has risen through most of its history and we have every reason to believe it will continue doing so.

More importantly right now, I just plain disagree with the prevailing view that the sub-prime mess, housing sector downturn, and credit crunch are dangerous. I’ve written that all along, even last summer when the market was falling and our bearish view in the medium term served us well. Even as I knew that the market would overreact on the downside, I also knew that there was nothing to fear in the headlines then scaring the market. I still feel that way.

In his Friday article, Mr. Markman passed along the views of a credit derivatives expert named Satyajit Das. Mr. Das believes that we’re on the verge of a bear market of epic proportions because:

Massive levels of debt underlying the world economic system are about to unwind in a profound and persistent way.

He’s not sure if it will play out like the 13-year decline of 90% in Japan from 1990 to 2003 that followed the bursting of a credit bubble there, or like the 15-year flat spot in the U.S. market from 1960 to 1975. But either way, he foresees hard times as an optimistic era of too much liquidity, too much leverage and too much financial engineering slowly and inevitably deflates.

Like an ex-mobster turning state’s witness, Das has turned his back on his old pals in the derivatives biz to warn anyone who will listen — mostly banks and hedge funds that pay him consulting fees — that the jig is up.

There are problems with this approach to forecasting.

First of all, long-term forecasting — other than to say that the market will rise in the long run — is an exercise in coin flipping. The only honest thing to say about the market’s course over the next five, 10, 15, and 25 years is that we haven’t the foggiest idea.

Second, “the jig” in credit markets was supposedly up two years ago, then last year, then at the beginning of this year, then last spring, then in August, and now yet again. Notice that all we’ve seen reported are near failures in the system, never actual failures. There’s a reason for that. Central banks, hedge funds, investment banks, institutional managers and others have been on top of this credit problem for a while now. It’s not inconsequential, but it’s not a systemic shutdown and certainly not worthy of the label “epic proportions.”

Third, companies are doing well. Did you see Oracle’s strong report last Friday? How about Nike’s? Apparently they’ve managed to keep the register ringing during this end-of-the-world moment.

Finally, I am careful and do realize that this is not a game, that it involves real money earned by real people. That’s why I work very hard to try to understand what’s really happening in the market, not what’s being reported. To keep money growing at its maximum velocity requires boldness based on sound research.

It was bold for us to charge back into the market two weeks ago, but it was not reckless. I wrote then that the medium term would be strong in the market, and I still believe that. I also believe that if you haven’t put your money to work yet, you should fight the fear and invest.

If you’re waiting for a green light and a market that presents no reasons to fear, you’ll be waiting forever and your money will stagnate.

Be bold. Join us. Profit when others panic and see the news in a whole new light.

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