Thursday, August 26, 2010

Take a Stock to Lunch

Just over ten years ago, a health aide gave The Famous Author a stock tip. Buy AOL at $400 a share, he said. Being the contrarian he is, TFA immediately ran to his broker and wanted to short the entire NASDAQ market. If taxi drivers, health aides, and drugstore clerks were touting stocks, it was time to get out of the market.

TFA was early back in the fall of 1999. The stock market still had a few more months left to soar as individual investors (that's us, people, the little guys) poured their savings into the stock market. That watershed marked a record level of individual involvement in stocks -- close to 150 million Americans owned equity in corporations -- if not individual companies, then in mutual funds and 401K holdings.

In short, the little guy's interest peaked just before the crash of 2000.

Now it's a decade later and guess what? Individuals hate stocks. They've never hated them more. In fact, they just did something they've never done before. So far in 2010, small investors have liquidated $33 billion worth of stock mutual funds. Back in 1999, every month saw a billion going in. Now, the little guy is scared. He's pulling out completely. He thinks the stock market is headed to zero.

Hey, I could be wrong. But experience tells me TFA is dead right. 1999 was the time to sell, 2010 is the time to buy. For long term investors, 50 or younger, it's time to bet on the future again. Play it safe and buy SPY ($105 a share) -- an index of the nation's top 500 companies. Or take a shot with TFA and buy OMEX ($1.50 a share). He thinks they're about to discover another $500 million treasure.

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