Commentary; Posted: 9/8/04

Olympics provide lessons in investing

Dave Purdy
Guest Columnist

In a spectacular opening ceremony, the Olympic torch was lit, fireworks exploded, and the games began. Now all we need is for somebody to do the same thing for the stock market.

As I watched the games on TV, I realized that the Olympics can teach us a few things about investing.

First, not everybody wins. Despite their best efforts, gymnasts will fall off the beam, sprinters will fail to make it out of their heat and divers will make too big of a splash. Likewise, some investors will never reach their goals. But with the help and guidance of a financial advisor, I think the odds of standing on the podium are much greater.

Second, the stock market wonít go up every year. Just like the Olympic Games happen only every four years, we canít expect the stock market to have an ìOlympicî year every year. And with the Dow Jones Industrial Average down 6.0 percent so far this year, itís not looking like an ìOlympicî year for the stock market.

Third, at times the stock market can seem listless but that doesnít necessarily mean thereís nothing going on. The Olympics takes years of preparation yet we donít see or hear much about them until we get close to the two-week spectacle. The stock market is similar in that it can lay relatively dormant for a long period of time and then, almost without warning, it can explode into a powerful upsurge like we witnessed in the fall of 1982.

Remember that past performance is no guarantee of future results. Is the market missing something or is it telling us something? The answer to that question depends on whether youíre bullish or bearish.

The bulls would say the marketís malaise over the past eight months is unjustified because of the solid growth in corporate earnings and the turnaround in the job market. But the bears would counter by saying the malaise correctly anticipated a new rising interest rate cycle, slowing (but still solid) earnings growth, and the ever-present danger of terrorism and its associated effects such as higher oil prices.

So whoís right? In reality, the question of whoís right is really not an important question to answer. Whatís important is that we have both bulls and bears.

At its most elemental level, itís bulls and bears that make markets. Someone bullish buys a share from someone who is bearish and we have a trade. That happens thousands of times a day. Sometimes, the bulls are a little more aggressive and the price gets bid up. Other times, the bears are in charge and the price goes down.

Where we run into trouble is when the herd instinct takes over and we have too many bulls or too many bears. When the bull herd is in charge, we may end up with a technology bubble like we witnessed in the late 1990s. The denouement of that was devastating for many people.

When the bear herd is in charge, we may end up with a crash like we witnessed in October 1987. Either way, a herding market is not good. Thatís why the current standoff between bulls and bears, while frustrating in the short-term, is actually healthy.

It suggests investors are carefully weighing the pros and cons and concluding that the market may be reasonably priced.

My hope is that as the election year draws to a close, the bulls will eventually gain a slight majority and gradually move the market higher.

Writer David Purdy is president of Wealth Management Midwest, Forest Lake, and offers securities through Linsco/Private Ledger, Member NASD/SIPC and an investment advisor.

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