Amusing stock investing rules

Question: Are there any rules of thumb when it comes to investing in stocks?—asked at “Ask a friend, ask Efren” free service available at www.personalfinance.ph, Facebook and SMS.

Answer: Stock market investing is teeming with intricacies and risk; perhaps that is why stocks provide investors with the highest potential return among the three major asset classes of stocks, bonds and money market. And perhaps to calm their nerves, investors have come up with rules of thumb that they can rely on, especially during uncertain times.

In the United States, a number of rules of thumb have evolved about stock investing in particular and the direction of the economy in general. Here are some of them:

Skirt Length or Hemline Theory—The shorter the skirts, the higher the stock prices. Is there a real connection? That has yet to be seen especially with fashion changing as fast as price trends in the stock market. But there was a time when people believed that the short skirt lengths mean higher consumer confidence and apparently bolder consumer clothing preference and higher stock prices. In contrast, ladies would dress in longer skirts when there is fear and gloom in the economy, which would eventually lead to bearish stock prices.

Men’s Underwear Index— Not to be outdone, investors also came up with an indicator using men’s apparel. Purchasing men’s underwear is a necessity. But when the economy is bad, it is believed that men would tend to delay their purchase of new underwear. After all, no one will be able to see how loose the fit is.

Conversely, a growth in the sales of men’s underwear is taken as a signal of a growing economy. According to Investopedia, no less than former US Federal Reserve chair Alan Greenspan subscribed to this thinking. Now, whether Mr. Greenspan would actually delay the purchase of his own underwear is none of our business.

The men’s underwear index can easily be distorted by many factors. One is that wives tend to buy their husbands’ underwear. So, the shopping habits of wives need to be considered. In addition, being generally not into fashion but more into utility, men tend to delay buying underwear until these articles of clothing develop the phenomenon called “bacon garters.”

Hot Waitress Economic Index—This index says that the greater the number of attractive servers, the weaker the economy is. The rule states that attractive people generally find it easier to land higher paying jobs during boom times. But, in really bad times, even attractive people will find it difficult to find a job and will be compelled to apply for lower paying ones like waiting on tables.

The index is obviously not only insulting but also discriminatory. More importantly, traditional economic theory states that employment is a lagging indicator.

Leading Lipstick Indicator —The indicator was put forth by no less than Leonard Lauder, the chair of Estee Lauder. The rule states that ladies tend to forego expensive indulgences, such as leading lipstick brands, in times of uncertainty. So, if the sales performance of the leading lipstick brand picks up, it must mean that economic growth is also picking up. Surprisingly, the indicator had been fairly accurate in the past.

But at the end of the day, nothing beats solid macro and micro fundamental studies backed by shrewd technical analyses and devoid of emotion. And one should note that these rules of thumb were devised in an American setting and may not be readily applicable in other countries.