Would I Buy Stocks Again?

I was asked this question by a reader in an email and it is one I think about quite often. Rather than just answer it in private I thought I'd do it here.

I just don't know how to value stocks these days. There seems to be two things driving them and I'm not a fan of either.

1. I'm not a believer in debt based stock markets. It reminds me too much of the Great Depression. We're pumping so much new unsustainable government debt into the system as an attempt to simply prop things up. That does not comfort me.

2. I'm not a believer in commodity based stock markets. It reminds me too much of the 1970s. I was tempted to buy stocks when the prices were lower, but I was even more tempted to buy things like oil and palladium. In hindsight, as impressive as the stock market rally was from the bottom, the rally in oil and palladium was even greater. That does not comfort me.

In my opinion, we're combining the deflationary Great Depression and the inflationary 1970s to form a relatively tame inflationary enviornment. Unfortunately, two wrongs are not going to make a right. Both eras were known for their high unemployment and that's exactly what we've been getting.

If you could show me a relatively sustainable US debt path and relatively stable commodity markets then I do think I could own stocks again. We seem to be further away from that environment now than when I turned bearish in 2004 though.

Here are two things we know for sure.

1. The rate of recovery from this current recession has been anemic at best. At the pace we are currently on, it could be many years before we fully recover.

2. If we slip into another recession before we've fully recovered from this one, things are going to get really ugly.

The DJIA was roughly 10,150 when I exited in 2004. It sits at roughly that level now. It's been 6 years of nothing. We could easily get 10 more years of nothing. I'm not saying we will. I'm simply saying that we could.

Krugman: Lost Decade Looming?

Despite a chorus of voices claiming otherwise, we aren’t Greece. We are, however, looking more and more like Japan.

I will end this on one of my favorite quotes. I use it often.

It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong. - George Soros

If I buy stocks and I am right to do it then I will be better off in the future than I am now. I don't really need to be better off though. I live a modest lifestyle and I have no great material wants. Having twice as much money will not double my happiness.

If I buy stocks and I am wrong to do it then I will probably need to go back to work at some point. Further, if I am wrong to buy stocks now then unemployment could be even higher in the future than it is now. That would not be an ideal environment for me to find a job that I may desperately need.

All things considered, owning stocks is just not worth the risk to me.