Have You Any Business Being in the Market? – Part II

From Chuck: “What do you mean ‘people who have no business being in the market’? I just got into it via inherited stocks. Should I get out? How can I go from being someone who shouldn’t be in the market to one that’s acceptable? If in fact I’m unacceptable!”

A hundred brokerage firms will find you more than acceptable. But if you just inherited stocks, you’re one of the lucky ones who can sell at a big profit without triggering capital gains tax (the “cost-basis” for your stocks rises to their price at the date of death), and you should ask yourself (a) whether you feel competent to evaluate the prospects of the companies you own and then (b) whether their stock prices under-reflect, fairly reflect, or exaggerate those prospects; i.e., a company can be swell and still have its stock be too expensive to make it a good buy.

What many do is leave this job to no-load mutual fund managers — though choosing a mutual fund that will do well for you is no slam dunk, either. (This is why some people choose index funds, knowing that they won’t hit a homer but that because of the very low expenses and tax-turnover, they will do better than 80% of their friends’ and neighbors’ mutual funds over the long run.)

The dilemma for Aaron (yesterday’s comment) and Chuck and the rest of us is that, on the one hand, it’s true that over the long run, stocks in this country have always outperformed “safer” investments. And it’s true that almost no one is able to time the market successfully, hopping out when it’s up, hopping back in after it’s dropped. And it’s true that this is an exciting, hopeful time for capitalists around the world, with great technological advance, freer trade, and potentially more than a billion new participants in markets from Russia to China to Africa.

Great. But — on the other hand — does that mean people should only buy stocks, and at any price? Take Coke. A great product, a great company. But a great stock? I argued no, last May. And then again in June, when the stock had hit 70.

If you already owned Coke in a taxable account, then selling it at 60 or 70 and realizing a huge taxable gain might not have made sense. But buying it at those prices made even less sense to me. And that would be true of lots of other stocks, even today with the market down a little from its record highs.

If you don’t feel that you can judge what a stock “should” sell for, maybe you shouldn’t be in the market, or at least not calling the shots yourself. (And in my experience, most people will do better in mutual funds than having a buddy who’s a full-priced stockbroker do the stock picking for them.) It’s like being plunked down, you know not where, in a home that seems quite nice. But you don’t know the neighborhood, or even what city you’re in, and so you don’t know whether $129,000 is a fair price, or $189,000, or $259,000 or — if it’s in Greenwich or Bel Air — $899,000. You’d have no business buying the home without knowing what it was worth.

Monday: Felony Dumping