If You're Thinking About Buying Stocks Now, Stop!

TheStreet.com

NEW YORK (TheStreet) -- As I pointed out in my last article, there is a palpable anxiety afflicting investors who haven't benefited from this year's rally. Based on market action during the first two days of this week, it's clear their worries are overpowering those of investors who want to protect their profits.

Those who have been on the sidelines are now in a process of capitulation. They see the S&P 500 (^GSPC), Dow Jones Industrials (^DJIA) and Nasdaq (^IXIC) rising and they say: "I can't take this anymore!"

If you find yourself in this situation, heed my warning: If you buy stocks now, there is no hope for you.


Investing Is a Craft That Requires More Emotional Than Logical Resources

Let me be clear: Stocks will probably rise further from current levels.

Stocks are not expensive now; they are actually well within ranges considered to be "normal" by historical standards, if we look at price-to-earnings ratios based on trailing earnings, forward earnings and even properly constructed estimates of normalized earnings. In addition, despite some recent hiccups, medium-term economic fundamentals in the U.S. are actually improving, and the economy could be growing by over 3% by the end of 2013.

Furthermore, most technical indicators suggest that the market is in the midst of a prolonged uptrend.

So why do I say that there is no hope for sidelined investors who buy stocks now?

It has nothing to do with their analysis of fundamental or technical indicators. It has to do with their emotional endowment.

You see, successful investing is not just about the ability to rationally analyze fundamental and technical indicators. Success in investing has more to do with certain emotional traits and skills. For example, the ability to: A) Not sell when seemingly everybody else is selling and every fiber of your body is screaming at you to sell whatever you can before it is too late. B) Not buy when seemingly everybody else is buying and every fiber of your body is screaming at you to buy before it is too late.

If you have been on the sidelines for all of 2013, you are currently being put to a test. You are experiencing the situation described in point B above, and you can hardly stand it.

However, if you cannot pass this emotional test, if you cannot resist the urge to buy, you simply have no business investing in stocks at all. Ever.

If you cannot emotionally take "not making money," then you will definitely never be able to handle the moments when you will be losing money (a situation that is totally inevitable). Because the psychological distress from prospective a loss is far more intense than the distress caused by foregone gains. If you can't take the latter, then get out of the kitchen because you certainly cannot take the former.


If you're an investor/trader who has been sidelined of all of 2013 and you can pass this test, then there is hope for you. There is lots of hope, in fact. Because the laws of human nature and markets are such that investors always get a second, third, fourth and fifth chance. For as long as financial markets exist, stocks will go up and down. They will become expensive and cheap. Therefore, there is absolutely no doubt that you will have another opportunity to buy stocks when they are down and cheap. Today is not the last day that stocks will be at these valuations. In fact, it is guaranteed that no matter how high stocks rise from here, valuations will eventually be lower than they are today. You can bank on that.

What If You Are Already Long?

Conventional investment advice would be that, when making investment decisions, it should make no difference whether you are already long or not. If stocks are attractive based on fundamental or technical indicators, then investors in cash should buy stocks, while current owners of stock should hold.

But the conventional wisdom comprehends very little about the role of emotions in investing. People who are currently on the sidelines are simply not in the same situation, from an emotional point of view, as people that bought in 2012 or before. Therefore, giving these two sets of people with different emotional situations, the same investment advice is a mistake.

Conclusion

The person who has been on the sidelines this year simply needs to accept that he did not catch the big up move in stocks and index ETFs such as SPDR S&P 500 ETF, SPDR Dow Jonesand PowerShares QQQ Trust . That is history. Now they really need to step back, take a deep breath and focus on capitalizing on the next opportunity that will present itself, because there will be one.

So do you feel that you are at the station and that you just missed the train to gains on Wall Street? Don't worry. Go over to the concession shop, pick up a book and have a nice cup of tea. The next train leaves in 22 minutes.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

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