If the stock market climbs the wall of worry this way, what's the lesson for would-be investors? The answer, which sounds counterintuitive, is to be more opportunistic when others are fearful of buying stocks and wary when people are rushing into the market. As an illustration, if at a given time there are, hypothetically, 100 worries and only five “positives” (i.e., times seem really bad, and people are fearful of buying stocks), then all of those worries and positives are priced in. With the market correspondingly priced for low expectations, it may be a good time to buy stocks. Conversely, if at a given time there are 100 positives and five worries (i.e., times seem really great, and people are rushing in to the market), then all of those positives and worries are priced in too — in which case, with the market correspondingly “priced for perfection,” it may not be a good time to buy.
Does that mean that there won't be unforeseeable crises that are not priced in? No. Another Wall Street saying states that “If you've seen one crisis, you've seen one crisis” (i.e., you haven't seen them all because each will be different). So crises will come, and some investors will sell. But others will view those inevitable downturns as buying opportunities.
Ian Ogilvie works for a financial services company in Oklahoma City. His column appears here monthly.