Are we there yet?

A good question - Are we at the bottom?

Looking for the Bottom is a Holy Grail quest that will bamboozle investors without a long term strategic horizon.

Before the markets open today, just a word on market bottoms. 

Some of the most interesting questions in investing are especially appropriate today: “Since you expect more bad news and feel the markets may fall further, isn’t it premature to do any buying? Shouldn’t you wait for the bottom?”

To me, the answer is “no.” We never know when we’re at the bottom. We can pour over past stock charts, and there are a deep pit of these,  and we still will not know what will happen today in the markets. A bottom can only be recognized in retrospect: it was the day before the market started to go up. By definition, we can’t know today whether it’s been reached, since that’s a function of what will happen tomorrow. Thus, “I’m going to wait for the bottom” is an irrational statement.

If you want, you might choose to say, “I’m going to wait until the bottom has been passed and the market has started upward.” That’s more rational. However, number one, you’re saying you’re willing to miss the bottom. And number two, one of the reasons for a market to start to rise is that the sellers’ sense of urgency has abated, and along with it the selling pressure. 

That, in turn, means
 (a) the supply for sale shrinks and 
(b) the buyers’ very buying forces the market upward, as it’s now they who are highly motivated. 

These are the things that make markets rise. So if investors want to buy, they should buy on the way down. That’s when the sellers are feeling the most urgency and the buyers’ buying won’t arrest the downward cascade of security prices.

The old saying goes, “The perfect is the enemy of the good.” Likewise, waiting for the bottom can keep investors from making good purchases. The investor’s goal should be to make a large number of good buys, not just a few perfect ones. 

Follow on Twitter @JacolineLoewen