The Blood is in the Streets

The above maxim has been attributed to some of the most feared and admired investment gurus in history – Rothschild, Soros, Buffett to name but three. Indeed, it is likely very sage advice, particularly with the benefit of hindsight of course.

It seems that we may be at that point in the economic cycle when things are at their worst, when people are at their most pessimistic. To bolster this view, I present a number of exhibits:

• In a recent survey, more than 40% of investors born after 1980 agreed with the following statement: "I will never feel comfortable investing in the stock market."
• The equity/risk premia has never been higher in the last 60 years – which means stocks are undervalued
• Returns on sovereign bonds are at, or below, 2%, so there is no great advantage in keeping savings in low risk assets as they don't outpace (the admittedly low) inflation
• Just 43.6% of financial advisors planned to increase their clients' allocation to stocks this year, down from 63.4% at the start of 2011
• 2011 saw the biggest flight from stock funds since 2008 and suffered the second-worst annual exodus of the past 27 years.
• The return of the S&P (through both outright growth and dividends payments combined) actually fell in the last decade. This has never happened before – even in the 1930's, the return was just into positive territory.
• 2011 was the worst year for redemptions on the US stock markets after 2008. Those years were the worst since last century. So, there are many indicators to show that red stuff is swishing around the lanes outside your front door – but is it the time to buy?

One would have to have a strong stomach and equally strong nerves to go 'all in' to the market at present, but if you have a longer term perspective and can 'drip' money into volatile markets then this could be the buying opportunity of a lifetime.

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