Saturday, January 2, 2010

Steins law and the New Year

Welcome to the New Year -- a perfect time to review my last post on  Stein's Law:   "Things that can't go on forever, don't"

My last look at Stein's Law was about chasing economic tides that obviously can't go on -- the housing bubble, credit default swaps, $150/barrel oil, etc.  Everyone rushing in, trying not to be the "only one" not making money on the gold rush du jour.   Regular folks lost a lot of money hoping that they could jump on the bandwagon and make some money on these rising stars.    We all know how that ended!   Even though they thought housing prices would continue to rise into the next millennium -- housing prices dropped like a rock.

What does all of that have to do with the New Year?  Well, Steins Law also applies in reverse.   Only this time, people find themselves at the bottom looking up, believing that the recession, depressed housing prices, depressed bank stocks will go on forever.  Steins Law says that they won't.  Things will come back.  How long will it take is the question.

Steins Law is valid at the top of a boom--the boom won’t last forever.  It is also valid at the bottom of a bust--the bust won't last forever.

Start the New Year fresh, look for signs that the economy is turning around.   Most novices buy stocks when it is a "sure thing" as the market is rising, and sell stocks, trying to cut their losses, when the market is crashing.  The true skill is to be a contrarian and follow Stein's Law  -- sell when the market is rising, and buy when the market is tanking.

2009 was a challenging year.  Flu epidemics and recessions that can’t go on forever, don’t.      

Look for opportunities in 2010.

Happy New Year!

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