What We Don't Know about the Markets

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 |  Includes: DIA, FXI, QQQ, SPY
by: Larry House

It is important to know what you don't know. That may sound like doublespeak, but it absolutely makes sense in this current investment climate. What you don't know can hurt you, and what you THINK you know can as well. I humbly (and believe me, this market has humbled me) offer some of the things we must keep in mind that we do not now know. Then we can act accordingly.

1) We don't know if we are in a recession or a depression. You will hear every possible opinion on this, but the fact is we don't now know. We have reached recession levels, and it is yet to be seen if it deepens further and lengthens.

2) We don't know if this recession/depression will last for quarters or years. One talking head says the economy will turn upward early next year; another says mid '09; another says two years; another says five years of no economic growth. The fact is we don't yet know.

3) We don't know if the stock market has put in a low for this down cycle. Again, opinions by very smart investors/advisors come down on both sides of this issue. The truth is we don't yet know.

4) We don't know if this is the the time to buy stocks or not. You will read one opinion that long-term investors should be buying stocks now. I guess anyone could hide behind several years and say if you hold for many years you stand a good chance to make money. That is hard to disagree with, but who wants to put in new money now, only to perhaps be underwater almost immediately, and then hope to get back to even?

5) We don't know what earnings will look like in '09 and beyond. Again, there are many opinions out there about next year's earnings, but we just don't know.

6) We don't know if any of the rescue efforts of our government and others will work or if they work how long it will take to see improvement. Our government is trying unique ways to restore liquidity and to bolster the consumer. Obviously everyone hopes it will all work, but we just don't know at this point if the actions will perform as intended.

7) We don't know if deflation is taking hold to stay or if it is short-lived only to give way to inflation, maybe hyper-inflation. Economists all read the same tea leaves, but they read them in greatly differing ways. Opinions are cheap, but we just don't know the answer right now.

8) We don't know if stocks will ever bounce back to what they were a couple of years ago. The world is changing. Deleveraging may not take us back to where we were; it may well take us to someplace new. We are so early in this global process that we just don't know what the new world or "destination" as some call it will look like.

I am sure you can add some items of your own to this list of "what we don't know." So what is one to do in this opaque investing climate? To each his own, but I would suggest extreme caution but not hibernation. I would:

1) Have some but perhaps limited exposure to stocks with a diversified portfolio. I am more into value stocks than growth right now. I am exposed to China because if there is any country in the world that has a chance to have growth in its economy, I think that is China. I am prepared to wait. Also, I can't help but nibble on some things that look cheap. I may be years too soon, but only time will tell. I do believe better days are coming; I am just a little fuzzy on the timing!

2) I am overweight short-term bonds. Bonds offer some more stability than stocks (although they bounce around too), and I just can't see stocks returning more than bond yields for the foreseeable future.

3) Hold cash. Preserve funds to buy what you want when you think the time is right. I am no market timer, so I stay exposed to all the asset classes in my allocation; some of the assests are just underfunded at the moment.

4) "Unto thine own self be true." Be honest with yourself about what is known and what is not known. Time can cover a multitude of investing sins, so know your investment horizon and don't violate it. Some (like Cramer) are now saying if you can't hold stocks for at least five years, then don't buy stocks. You have to decide what is right for you.

5) Be skeptical of ANYONE who says he or she knows what is going to happen. I have never seen a thicker fog than we are investing in right now. With such a fragile world economy now, I shudder to think how susceptible we are to a Black Swan event. That is why I hold gold and silver bullion as an asset class.

6) Not everyone will agree with me, but I am using funds more now than making my own individual picks. There is greater diversifcation, I hope they know more about what they are doing, and it is easier to dollar-cost-average as time goes on. Also, it is easier to add foreign exposure in a meaningful way.

Good luck. Be careful. Question everything. I look forward to your comments. We are all in this unique time together. I have gotten some very good ideas from comments here on Seeking Alpha.

Stock position: None.