Stocks: Risky, But Tempting

On Friday, I got an email from my friend James:

If you had some $ to invest now, where would you put them? I'm considering going long some equities, but its a nauseating market out there...
in the financials, does Citi or even the crappy CountryWide become a 'bargain' at some price...? my gut tells me that with as yet unquantified loan losses, the sector news will get worse before it gets better.

This morning, he'd changed his mind:

Please ignore my request for stock tips!
I think I'll be staying away from the stock market roller coaster right now, despite the apparent 'bargains' to be had.

If you buy stocks when they're going down, they might be cheap, but they're almost certainly going to get cheaper before they rebound (if they rebound). Anybody buying equities (or anything other than Treasury bonds, really) in this environment should do so only if they're perfectly comfortable with losing money in the short-to-medium term on a mark-to-market basis. If you listen to Brad DeLong, or if you look at historical price-to-earnings ratios, there's a case to be made that stocks in general are reasonably good value right now. But there's certainly a case to be made that stocks in general are going to be very volatile for the foreseeable future, so people who worry about losing money should go nowhere near them.

If you have that iron stomach, then of course the thing to do is buy index funds. Your stock picks, no matter what they are, are not likely to beat the market. And making a punt on something like Citi or Countrywide is a very risky proposition. Countrywide, especially, is a merger-arb play right now, and when the risk-arbitrage professionals are marking it down to $4.36 a share despite the fact that Bank of America has agreed to pay $7.16 per share, I think it's worth assuming that they know something you don't.

Still, everybody loves a bargain. The S&P 500, at 1,277, is almost exactly at the same level it was at two years ago. Could it get cheaper? Sure. But is it a better buy now than it has been for any time in the past 18 months? Undoubtedly.