Thursday, March 29, 2012
The stock market's cheerleading squad was out in full force on Monday.
The day started off with a speech by Federal Reserve Chairman Ben Bernanke, who said the same thing he said last week... which was the same thing he said last month... and the month before that... and the month before that.
Investors responded like Pavlov's dogs and pushed the S&P 500 to a new yearly high.
Then came the parade of bullish analysts and talking heads on every financial news network. "Buy stocks because interest rates are low," they cheered.
"Buy stocks because the dividend yields are higher than what you can get on government bonds!"
"Buy stocks because the economy is growing and corporate America is profitable!"
These are all fine reasons to buy stocks. Sure, they're arguable. But if you're looking to buy stocks today, these are logical, rational reasons to jump into the stock market.
But the reason that got the most airtime was the single stupidest reason to buy stocks...
"Buy stocks because it's time for portfolio window dressing!"
"Window dressing" describes what happens on Wall Street every quarter. Basically, institutional money managers attempt to spruce up their portfolios and make them bright and shiny for any customers who may want to have a look inside.
They do this by selling off all the underperforming positions and buying all the stocks that have been the biggest winners. So when a customer looks at the fund's holdings, the money manager can say, "Look at all the wonderful stocks we own." It doesn't matter if they bought them yesterday at their 52-week highs. All that matters is that the fund can show it owns the quarter's best performers.
It's a terrible reason for you to buy stocks.
The best time to buy stocks is when they are out of favor and on sale. The best time to buy a winter coat is in the summer, not when it's prominently displayed in the windows at Saks Fifth Avenue. The best deals are tucked away near the bottom of the "clearance bin" in the back of the store.
Of course, if you need a designer-brand swimsuit for your upcoming spring break vacation, you have no choice but to pay top dollar for it today. That's the dilemma money managers face now as they pay 62 times earnings for shares of Chipotle Mexican Grill.
If you don't need to add a new stock to your portfolio today, you'll probably get a much better deal on it a few months from now. That's particularly true with most of the stocks that are trading at new highs this week.
Best regards and good trading,
If you're taking your trading clues from CNBC, you should reconsider. The market leads the news... not the other way around. Read more here: The Only Way to Trade on the News.
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