Is Now the Time to Buy Stocks?
Wednesday, November 12th, 2008The Wall Street Journal today published this letter by John H. Cochrane, a professor of finance at the University of Chicago. Highlights:
When prices are low relative to dividends, subsequent seven-year returns are likely to be high. Stocks do not follow a “random walk”.
…increasing risk aversion amplifies an initial price decline—coming from bad earnings news or the huge rise in credit spreads—into a rout. If this is indeed what is going on, it also means that unleveraged, long-term investors should be buying, since prospective returns are better. But this line of thought still does not justify wild optimism.
If you’re less leveraged, less affected by recessions, and have a longer horizon than the average, it makes sense to buy. If you’re more leveraged, more affected by the recession or have a shorter horizon, it might be the time to sell, even though you might be cashing out at the bottom. If you’re about the same as everyone else, do nothing and relax. If you’re wrong, at least you will have excellent company.