"Putting Money To Work"

I am growing tired of listening to the bull argument that the market is going to go up because people have to start "putting their money to work".

This argument rests on the tenant that all investments in the stock market are the same. Anyone who follows this logic has never taken an investment valuation class. In addition, they do not really understand accounting rules. "Profits" are not a mystery. However, in large corporations they are not as simple as they seem. Shady accounting practices (especially with the suspension of mark-to-market rules) can make corporations appear profitable, when they are indeed insolvent.

If you really want the tools to understand investment valuation, go take a course on it, or read a book about it. A class on pricing options and bonds would also be valuable. If that is not of interest to you, you can understand that I already have and either listen to what I am telling you, or not.

Ultimately, (not in the short run) it is the discounted value of "expected" future cash flows that determines the value of a stock. When the "actual" does not equal the "expected", stock prices fluctuate rapidly in either direction. The trading game, or arbitrage opportunity, centers around who's perception is closest to the "actual". The guy (or gal) whose perception is closest to reality, or the "actual" will win in the end. We are now in the gap, with different interpretations of reality battling each other. Only time will reveal the winners.

Let's make it easier to understand:

Let's say I have a start-up tax preparation firm, which just happens to be true. I ask you to "invest" in my firm. I want you to "put your money to work". What questions would you want to ask me before you gave me your money?

Wouldn't you want to have some idea of when and if I was going to actually pay you a return on your investment? Wouldn't risk matter? If I could show you, with business plans and models that I was going to pay you 2% a quarter, or 8% a year, at some undefined point in the future. Would you take the deal? That would depend (thanks Andy, if you ever read this)...it would depend on your risk tolerance, your assessment of my work ethic, your assessment of my business plan, the level of debt I was taking on to finance the firm, my intelligence, perhaps even my integrity. There would be many factors to consider.

Now, let's say I "went public" and invited a vast amount of investors to "put money to work" in my firm. This would allow me to finance a large expansion and perhaps increase your return. So now I have this hot IPO, I haven't actually paid you anything yet, but you are very pleased because the "value" of your investment has increased dramatically, and on paper it looks like your money is working really hard. On paper you are rich.

The next day the government passes a flat tax. Ooops. Now, my firm is worth 25% of what it was originally. My creditors are calling, but nobody needs tax preparers anymore. Ooops.
I try to pay you back, but I am bankrupt, and can't.

You didn't do your research. You didn't know the House and Senate were working on a flat tax. Plus, even if you had known, you wouldn't have believed it possible. (A Black Swan Event)

Was that a good use of your money?

Now, let's extrapolate that to the entire market. To the S&P 500. Can you truly make an informed decision in this uncertain economic environment as to whether "putting your money to work" in an index fund is a wise move? I'll give you that you now have diversification on your side, which could limit your risk, but it will also cut into your returns.

So invest away, but not in an index fund at this juncture in history. Don't believe you know more than you actually do. If you want to buy a stock because you have done research, analysis, you understand its balance sheet and you truly believe in the business, and you want to take on some risk to beef up your return, go ahead. But buy and hold index investing is a thing of the past because of the bursting of the credit bubble, at least for the next 7 years or so. Know the environment you are operating in. The rules of the game have changed.

Save your money, so you have some to "put to work" when the economic environment stabalizes.
Then you do the work, the work of finding a truly good investment.

Because, in truth, money doesn't "work". People do. Some investments are good, others are not. Do your homework on each and every investment you make.

And that's the way it is, according to Econmom.