Should You Invest in 2011 Like It's October 2008?

by: SA Editor Rocco Pendola

I fancy myself as somewhat of a cyclist. As one who is time-crunched, I can get some great bursts of training in by doing repeaters. Find a nice steep hill, ride to the top, ride down and do it all over again.

Before I moved from San Francisco, I found a list of the city's ten steepest hills, picked one, rode it about ten times and moved on to another. There's no question that despite the pain and downright fear ("what if my legs stop, the bike stops, and I crash into a parked car instead of making it to the top?"), riding like this makes you stronger.

Six months or a year later, you look back and realize that the decision to ride that hill one more time made you a better cyclist. All of your stats come in better than they might have otherwise. This process bears profound similarities to what investors face during times of crisis.

In our society, fear and uncertainty always exists. The sky's constantly falling. And, despite temporary euphoria over a political candidate, the new boss, same as the old boss mantra tends to hold. During times like the ones we experienced this past week, however, that endemic fear gets kicked up several notches. We all feel it. Even if we know better, it's tough not to ask, as you see the Dow crashing, "What if this time's different? What if things do not turn around?"

History shows that this too shall pass. It also teaches that, just like riding up that hill one more seemingly impossible time, buying stocks during times of elevated turmoil reaps rewards in the not-so-distant future.

Consider the position you would be in, had you gone long at the end of the week of October 6-10, 2008. This was the stock market's worst week in 75 years. The following table shows some key tickers at the close on October 10th, 2008, at the close on July 29th, 2011 and at the close this past Friday, August 5th, 2011.

Stock/ETF (Ticker Symbol) Close (Oct. 10, 2008) Close (July 29, 2011) Close (Aug. 5, 2011)
SPDR S&P 500 Trust (NYSEARCA:SPY) 88.50 129.33 120.08
PowerShares QQQ Trust (NASDAQ:QQQ) 31.32 58.00 53.83
International Business Machines (NYSE:IBM) 87.75 181.85 172.98
Akamai Technologies (NASDAQ:AKAM) 14.12 24.22 22.59
Target (NYSE:TGT) 37.00 51.49 48.65
Cisco Systems (NASDAQ:CSCO) 17.23 15.97 14.94
Hewlett Packard (NYSE:HPQ) 37.00 35.17 32.63
Click to enlarge

I purposely highlighted some laggards in that list to prove a point. Stock picking takes center stage, regardless of the market. Companies in fading industries and ones that fall behind in their respective spaces tend to underperform, regardless of overall market conditions. That said, the broad indices support the notion that going long when the world feels as if it's falling apart makes sense. You'll likely look back on your portfolio several months and years later, vindicated and proud that you made the correct choice in the face of fear.

Of course, the dates I picked to illustrate this are not perfect. Stocks gyrated wildly, off and on, before and after October 10, 2008. More importantly, who knows when we will see bottom? Is this it? Or do equities need to get to, or at least closer to, late-2008 levels before the pain and suffering (if you're long or would like to be) ceases? And, as I noted, it's tough not to wonder if maybe what's happening now finally represents the end of the American empire and the death of perpetual bull market. Of course, we've heard that before.

The immortal words of the poet Springsteen apply as you consider what to do Monday morning and into the week:

Tonight I'll be on that hill 'cause I can't stop
I'll be on that hill with everything I got
Lives on the line where dreams are found and lost
I'll be there on time and I'll pay the cost
For wanting things that can only be found
In the darkness on the edge of town

We live in interesting times, as per usual. Like most things in life, success in the stock market does not come easy. It involves risk. It requires taking real chances that have consequences. It's about overcoming fear. Opportunities -- be it stronger legs, a faster time, sweet deals or bargains on stocks -- do not come easy. You do not realize them on the plush side of town. You've got to hold your breath, sweat and get dirty. And, hopefully, history will, once again, be your guide.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.