Every January 2 I smile to myself as I approach my health club�s parking lot. We all know it�s always the same thing: gyms burst with new members the first month of the year. Because I belong to two clubs (don�t even wonder why) this plays out in double time for me.
It�s one thing to discuss this phenomenon in the abstract (�It�s a result of human nature and New Year�s resolutions� and so forth). But it is truly stunning to participate in it personally by driving through the crowded parking lots, negotiating the lines at exercise stations, and knowing attendance will diminish by the end of the month.
Why do we act this way? The whole experience is a free ticket to the human nature theatre. Whatever drives us to make resolutions for the New Year must certainly influence the way we make investment decisions, too. These thoughts help center me as I think about the investment outlook for 2012.
Scholars have exhaustedly studied fear and greed�s impact on investors� behavior. But these two emotions don�t completely explain behavioral investing or our motivation to improve ourselves. I believe a third emotion�the drive for instant gratification�completes the full picture of today�s investors and New Year�s resolvers.
When our efforts don�t produce instant gratification, we simply quit. Like fear or greed, the drive for instant gratification is a primal one, and can probably be traced back to the dawn of humankind. From an anthropological sense, its purpose was most likely to help drive human survival.
Even today, we occasionally see instant gratification demonstrated in its most pristine form: In his book Between a Rock and a Hard Place, Aron Ralston recounts how, while rock climbing in one of the most remote spots in America, his arm became trapped and he lived on limited supplies for six days. Water was scarce, and every time he attempted a measured sip, his body instinctively convulsed to consume the entire contents at once, which would have meant certain death by dehydration. It was only by sheer mind control that he was able to tame his base instincts, and ration his water for the long term. He would not have survived otherwise.
How does this fit into my investment outlook for 2012?
Last year�s U.S. equity market returns were forgettable. Let�s face it: ever since the credit crunch most investors have been very slow to reenter U.S. equities. I think many investors have pledged to remain on the sidelines since then, never to suffer big losses again. That sounds like a long-term New Year�s resolution to me.
And I know that, like those new but declining crowds at my health club, those resolutions will fade. Staying on the sidelines preserved money, but it has not increased returns either. Investors will finally come back into the marketplace looking for that instant gratification of picking winning stocks. That�s the right action to take for the wrong reason, but so what?
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The sheer volume of demand will drive our markets up and the resulting stock rally will be impressive. Looking toward the next twelve months, I believe the U.S. stock market is very attractively valued now. There are many examples that back me up.
Take Ford (F) for instance ($12/share, $46B market cap). The company has paid off tons of debt, and recently reinstated its dividend. Ford�s stock took a beating last year, but its credit rating is one notch away from investment grade and moving in the right direction. With a P/E of less than 8x, the stock is cheap.
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