Tuesday, October 9, 2007

Staying In Stocks - Is It Worth The Risk?

You have discovered a rich alluvial gold bearing creek that no-one else knows about. By patiently panning in the river bed, you can extract $1,000 worth of gold a day. There is at least a year's supply there. That's $365,000 worth. Not bad money?

Only problem is theres a dam upstream that has a crack in the wall. This dam spills over into the river when it overflows. And it happens to have been built right on an earthquake fault line. The crack appears to be getting worse, but only very slowly. And there have been tremors in the area. Everyone knows about it, but strangely, each tremor only seems to make the locals even more complacent about the inevitable big one that is coming. There is no doubt the dam will collapse and flood the river in minutes if (when) there is a serious earthquake. And everyone knows it is coming. But when? Nobody knows. And the longer it takes the further away it seems.

If you are in the creek bed when the dam breaks, you will have no chance at all. You will be swept to your death. And you will have little or no warning, except the frequent tremors.

How long have you got? It could be one day. It could be a year. No-one knows. All you have is the tremors for signs and the knowledge of the risk.

Will you risk it? Only you can answer that.

Thats exactly what it is like being in the share market at the moment. Because the walls of these markets have not burst yet, despite the evidence of many cracks, complacency reigns supreme. Unsustainable debt threatens to cause collapse all over, but the solution is to just stick more Band Aids over it and keep the blinkers on.

The longer time goes on and the big one still doesnt arrive, the more we are tempted to go back and buy shares (pan for more gold). Yet now there is even less time until the big one.

Should you do it? Only you can decide. But I will try and re-paint the picture for you so that you know the pitfalls as well as the opportunities. You need to make the decision with the front part of your brain called the neo-cortex, which is the conscious, rational, logical thinking part. But when it comes to investment decisions, the neo-cortex is powerfully overridden by the larger limbic system of the brain, which is driven by impulse and emotion, not logic or common sense. You are not even aware of the unconscious urge you have to herd with others, to follow the crowd. Without even realizing it, most times you buy or sell shares or property because thats what everyone else is doing. And although purveyors of investment products, with a gun held to their head by regulators, pay lip service to the mantra past performance is no guarantee of future results, the reality is that that is totally ignored, by both clients and their advisers, so powerful is the limbic system of the brain. People tend to invest in whatever was hot yesterday.

Heres another way of looking at it: If you are in a herd of lemmings rushing to jump over a cliff to your death, should you leave it until the last minute to separate yourself from the herd, or should you get out when you first realize what lies ahead? And should you be tempted to go back?

But your challenge as an investor is nowhere near as difficult as the gold prospectors dilemma. You have a fantastic aid to help you in your decision. Even if you do not understand socioeconomics or Elliott waves, you have one simple rule that anyone can follow. When in doubt, always fall back on this one: Buy when prices are low, sell when prices are high.

http://www.grahamdyer.com The Graham Dyer Newsletter has not missed a month's publication since July 1983. His track record for forecasting is the envy of many, including the 1987 stock market crash, the demise of the Japanese economy and stock and real estate markets in the 1990s, the bull market for bonds from 1989, and the real estate boom this decade. His book is entitled: How to Profit from the Coming Great Depression. If you want to know the pitfalls of investing as well as the opportunities, Graham Dyer's world class work is a must read. For more of Graham's work you can visit http://www.grahamdyer.com