Capacity to Invest

It has long been argued back and forth whether it is possible to time the market. What this means is the ability to successfully pick the time when a stock is at a low and sell at a high. This can never be done reliably though many try and even succeed at getting it right enough of the time to be profitable.

The alternative is to buy on low valuation and sell at a high valuation, by whatever metric makes sense to the investor. This is the essential difference between investing on fundamental and technical analysis. There is more to it than this, but I'll leave all that aside since it's timing in particular I want to address.

Recently, we had the leaders of both Canada and the US talk about "buying opportunities" in the market. Harper talked about this during last fall's election and Obama in the past few days. Perhaps they are right, though in both cases the markets continued to fall after their pronouncements. Clearly the markets take their cues from elsewhere.

Why do the markets keep falling? Selling. What will cause the markets to rise? Buying. That is so basic it is hardly worth mentioning, except that it is worth mentioning. It matters now in particular since to see buying in the market we need a few things:

• Willingness to buy;
• Confidence in the outcome; and
• Capacity to buy.

There is some willingness to buy, maybe even a lot though it is hard to know. Confidence is low, as it tends to be when our portfolios take a hit and there are substantial fears of imminent unemployment. Perhaps more important is the capacity to buy - it isn't there.

Governments play a role in renewing confidence by acting to re-establish a stable equilibrium in the financial markets and in social safety programs. If they can do it right, 2009 could spell the end of the crisis, and the public cost of managing the crisis will be affordable. What the government can't do is rebuild people's capacity to take advantage of market opportunities.

That capacity is largely in the form of each person's asset base: savings, property and investments. Property is fairly illiquid and savings are typically small in comparison to investments. Which leaves us with investments as the source of most people's capacity to, um, invest. That's where the problem lies.

For most people their financial capacity to invest is already invested in stocks that have suffered massive declines very quickly. It is pointless to sell those investments to buy others if the intention is to create a net increase in buying pressure. The best one can do is move money from, one hopes, poor investments to better ones. However this is never guaranteed.

I do not think we'll see any substantial recovery in the markets until enough people regain their confidence in their livelihoods and retirements plans to begin once more to spend, including allocating a portion of that money into new investments. Of course by then, pretty much by definition, the markets will have recovered to a degree and so all those once-in-a-lifetime buying opportunities will no longer be quite so attractive. So it goes in the markets.