Stocks On Sale

Most investors are woefully underinvested in stocks. Many have allocated a tiny fraction of what they should allocate to stocks and some are out of the market entirely, saying it'll be a long, long time before they get back in. Like never.

It's a huge mistake.

But it's also a perfectly understandable mistake. The mega-bear market that ended in March wasn't just the worst decline since the Great Depression. It was the topper, a crushing crescendo to 10 years of abysmal performance. Investors have been slapped around since the market first cracked in 2000 -- to the tune of a 25% loss for the decade if they've been invested in big-cap stocks and 40% or more if they've been invested in Nasdaq or small stocks.

It's been an ugly decade, a lost decade for many investors, particularly for those who first started investing in stocks during this period. It's no wonder many investors are skeptical about the ability of the market to deliver returns sufficient to fund their retirement or other long-term needs.

Despite the last 10 years though, it doesn't follow that a skeptical view of the market is warranted. Even jaded investors know that the best time to buy stocks is on the heels of a massive selloff. But "knowing" and "doing" are two different things, and investors have come up with all sorts of excuses to avoid participating in this bull market. Here are a few of the more common refrains.

After the recent rally, the market is no longer cheap.

Unsophisticated investors are prone to falling for this falsehood, primarily because common benchmarks for valuation are misleading in the early stages of a bull market. For example, price-to-earnings ratios are altogether worthless in the current market. In 2003, in the midst of the last cyclical downturn, stocks such as Caterpillar (CAT - commentary - Trade Now), Cummins Engine, and Boeing were dirt cheap, but not if you looked at their P/E ratios, which ranged between 27 to 33. The ratios were high because their earnings were temporarily depressed. The stocks of the three companies went up an average of about 400% into the cycle peak in 2008. And after the meteoric rise in their stocks, their P/E ratios were much lower, at 11, 12, and 18, respectively, because of massive gains in earnings.

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At time of publication, Alsin and/or ACM was long NCR, Terex, Manitowoc, Boeing and Liz Claiborne, although holdings can change at any time.

Arne Alsin is the founder and principal of Alsin Capital Management, a California-based investment adviser. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback; click here to send him an email.