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Time to Lighten Up on Bonds

10/13/2011 6:30 am EST


John Buckingham

Editor, The Prudent Speculator

The recent panic selling in the markets suggests stocks are now a better long-term bet, says John Buckingham of The Prudent Speculator in this exclusive interview with

What role does sentiment play in all this market volatility?

The fascinating thing is that historically, investors get very optimistic near market highs, and then they get very pessimistic at market lows. So we do try to pay attention to investor sentiment.

One of the interesting things in the recent downturn that we’ve seen is that we just haven’t seen the kinds of negativity we’d like to see to say this is truly, truly a market bottom, similar to what we saw in March of 2009.

Don’t get me wrong, people are scared right now, but many of them are still viewing this as a buying opportunity including our mutual-fund shareholders and clients. They’re really wanting to buy, which, of course, is good, because I think we’ve taught them well. They should be buying now. But we like to see the masses not quite be so optimistic when you have gigantic swings in the market.

We’re looking for that capitulation. Those weak sisters should really throw in the towel and say I can’t take it anymore.

Yes, if you go back to 2008 and 2009, and that’s really fresh on a lot investor’s minds right now. Nobody wants to go through that again.

So there are a lot of folks out there right now who have thrown in the towel; certainly that’s happened. I’d like to see just a little bit more negativity, a little bit more doom and gloom. I don’t want to see all the talking heads like myself coming on television and saying it’s a great buying opportunity. I’d like to see people like me saying I’m going to hold off here a little bit here, wait and see if this downturn gets worse. So right now we really haven’t seen that, but it could happen. It doesn’t have to happen to make a bottom, but from a truly contrarian sentiment viewpoint, I’d like to see a little more negativity.

Why do you think 2009 market activity left people so bereft, particularly after the market came back and a lot of their 401(k)s and retirement funds came back?

Well, a lot of those same folks went through it in 2000 and 2001 and 2002 with the tech bubble collapsing. Then they said never again. Then they went through it in 2007, 2008, 2009 with the collapse of the financial system. Then they said never again.

So you know, once bitten, twice shy, a third time I don’t know. It’s that kind of mentality.

One of the other issues that people face these days is they just have no place to turn for yield and for return. If you want something safe, what do you do? Buy a Treasury?

You get nothing…

You get nothing on a short-term Treasury and you go out ten years and you’re still really getting a very low rate of return, especially when you think on an after-inflation basis. You might actually have a negative real return by buying a ten-year Treasury today, assuming you hold it to maturity. If you don’t hold it to maturity, you’re subject to market risk. You could lose some substantial money on a "super safe" asset.

In fact, when you’re talking about that, I think the ten-year TIPS, the Treasury Inflation-Protected Securities, are offering a negative yield, so we’re actually paying the government to hold our money, which makes no sense at all to me.

Right, then you see Bank of New York (BK) charging people, charging big institutions to hold their money. So again, as a contrarian investor I’m jumping up and down saying this is fantastic, because this is truly a sign that, at least among the professionals, panic has set in in terms of what am I going to do with cash?

I don’t want to put it in the market. I can’t even put it in my mattress. I have to put it in a bank and I have to pay for the privilege. So these are things you look for, and in my mind these are reasons to be optimistic about the long-term prospects for equities.

Is it time to start jumping in even though volume is very light or should we wait a little bit longer?

I think investors should stay true to their long-term asset allocation and their discipline, and given the downturn we’ve had in the equity market, chances are you’re light equities. So I do think it’s time to maybe take some money out of fixed income, especially if you’ve made a lot of money there, and move or shift some of that money over to stock.

Absolutely I think it’s a good time for new money to be coming into the stock market, certainly when you’re significantly lower than where you were three or four weeks ago.

Absolutely it’s time to come back in, but again always have that long term in mind, because if I had short-term money, I’m not going to try to play the up 400- and 500-point moves that you have in a single day. Only long-term should be investing in the stock market.

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