Margie is an idiot.
This colleague of mine recently asked me something that I recognized as insanity. She asked, “Why would I buy now if stocks are going down? Why wouldn’t I buy when they’re going up?”
Because you’re an idiot, Margie.
People see green, they buy. Apparently, of little consequence is the fact that by then the stocks have already gone up and you’ve bought when it looks “safe”.
If it sounds as though I am exasperated, it’s probably because I am. I am tired of reading about incessant bailouts, I’m sick of watching “experts” on CNBC tell me what happened two months ago as if it were a prediction, and I am utterly, entirely, and unreservedly nauseated over people asking me when this will be over and if their portfolios will ever turn around.
If you can sort through my obvious passive-aggressive literary discontent this week, you will find useful bits of information that you can use to lower your own blood pressure, and hopefully raise your account balance.
You can’t beat the market
What? Yes, you can. Plenty of people do it. It’s not a damn casino. If you think it is, good, I have some money to take off of you. I’m done.Â
You can’t time the market
Really? Someone look me in the eye and tell me that I’m not better off buying S&P Spyders (SPY) now than I would have been in October of last year. I’m not talking about predicting the future, I’m talking about seeing opportunities and seizing them.
The contrived idea of “average market returns”
One of the most basic, fundamental, broadly-held misguidings about the stock market is that the average return, over time, is approximately 10% per year.
This is an utterly useless statistic.
Here’s a brief analogy: The average temperature on Earth is 59 degrees. It’s a nice day when it happens, but the highs and lows throughout the year could kill you.
Behind this idea of 10% lies the eager, desperate minds of those that attempt to see patterns in the past and recognize the future. As a technical analyst, I believe that certain technical patterns can repeat themselves. However, fundamental patterns take much more convincing.
Besides the fact that not everyone enters the market with the same amount of capital or invests in the same securities, the advancements, power shifting, and globalization of the economy has dramatically changed (and will continue to change) our markets, making it foolish to draw comparisons between events in 1928, 1958, and those in 2008.
For crying out loud, there weren’t even personal computers in 1958, let alone discount brokers that have allowed the entire computer-and-internet-literate population to buy shares of stock. According to recent advertisements, even a baby in front of a webcam can place a trade with his blackberry.
Did the tech boom, the unwanted oil boom, and the ensuing… well, “boom” of financials falling flat on their faces show us nothing? That stuff hadn’t happened before. You can’t compare those events with many things in history, which is why such volatility, fear, and unpredictable market activity became (and still is) rampant.
So why is 10% so wrong?
Let’s say that most people who consider themselves investors will invest money in the market for a period of 20 – 50 years or so.
Let’s look at the return for a few 30-year stretches (of the S&P 500, a reasonable index to match general market returns).
From 1950 – 1980, the average yearly market return was approximately 7.25%. From 1970 – 2000, it was about 10.2%.
What’s the big deal? That’s not so far off.
The problem lies in the underlying statistical analysis of these numbers. In any case, when you look at any stretch of time spanning 20 years or more throughout the history of the stock market, the standard deviation of these return percentages is a minimum of 15.25%.
This implies that (assuming we take the “10%” number that is thrown around so carelessly among financial advisors and the like) that 95% of the time, the market will return somewhere between -20.5% and +40.5%. That is an absolutely absurd gap.
How can this be construed as any level of predictability? Go to any business in this country and predict that their profitability or earnings will increase by somewhere between -20.5% and +40.5% and they will call security to have you escorted far, far away.
Why trade the market?
Please take the following statement to heart:
You must think differently in order to earn high returns.
My account is up 25% this month. This was not an accident, nor was it attained on one single trade. It takes a little knowledge, a little level-headed thinking, and a little common sense.
Don’t think like Margie.
I would like to comment on two ideas that are embedded (if not embroidered) throughout how-to books on trading. These two concepts have secretly cost investors more money than I could ever count in five lifetimes.
The first of these subjective concepts that novice investors are forced to interpret and follow is some rendition of the following sentence:
“Hold on to your winners, get rid of your losers.”
Easier said than done without a crystal ball or looking into the rear-view. Many investors take losses (or wins) too soon to let their ideas develop. Unless someone picks the absolute bottom for a purchase or the absolute top for a sell, he is going to have to hold the position against him for some period of time.
No one, including myself, can pick perfect tops and bottoms with any regularity. Instead, I would like to give you some actual advice:
When you get into a position, be it long or short, you obviously have some confidence in that position. What you must do is continually evaluate the situation as if you had absolutely no vested interest in it.
In other words, decide whether you would a) buy, b) not mind owning, c) would not want to own, or d) sell.
If, at any point, you are two or more letters away from you original position, you should think about getting out.
The second of these concepts that absolutely drives me bat-s*** crazy is some variation on the following statement:
“Don’t average into losing positions.”
Generally, I agree with this idea, however it comes with a large, large stipulation – that you are invested in one individual stock.
One stock, alone, can have bad news, a turn of events, or other unforeseen challenges that may only affect that company.
On the other hand, trading indices (such as the SPYs, BGU, or BGZ that I have mentioned in previous articles) can offer you the benefit of minimizing company risk. To put it simply, averaging into these positions is actually an exceptional idea in my opinion. This is because if these ETFs crash, go to zero, whatever – we have a hell of a lot more to worry about than our investment account balances.
Remember this – if you’re going to make moves in the market, look at prices and events objectively. The market does not care who you are, what your position is, or how you got there. Best of luck as we await another bailout event.
John K. Whitehall
Analyst, Oxbury Research
Disclosure: no positions
This colleague of mine recently asked me something that I recognized as insanity. She asked, “Why would I buy now if stocks are going down? Why wouldn’t I buy when they’re going up?”
Because you’re an idiot, Margie.
People see green, they buy. Apparently, of little consequence is the fact that by then the stocks have already gone up and you’ve bought when it looks “safe”.
If it sounds as though I am exasperated, it’s probably because I am. I am tired of reading about incessant bailouts, I’m sick of watching “experts” on CNBC tell me what happened two months ago as if it were a prediction, and I am utterly, entirely, and unreservedly nauseated over people asking me when this will be over and if their portfolios will ever turn around.
If you can sort through my obvious passive-aggressive literary discontent this week, you will find useful bits of information that you can use to lower your own blood pressure, and hopefully raise your account balance.
You can’t beat the market
What? Yes, you can. Plenty of people do it. It’s not a damn casino. If you think it is, good, I have some money to take off of you. I’m done.Â
You can’t time the market
Really? Someone look me in the eye and tell me that I’m not better off buying S&P Spyders (SPY) now than I would have been in October of last year. I’m not talking about predicting the future, I’m talking about seeing opportunities and seizing them.
The contrived idea of “average market returns”
One of the most basic, fundamental, broadly-held misguidings about the stock market is that the average return, over time, is approximately 10% per year.
This is an utterly useless statistic.
Here’s a brief analogy: The average temperature on Earth is 59 degrees. It’s a nice day when it happens, but the highs and lows throughout the year could kill you.
Behind this idea of 10% lies the eager, desperate minds of those that attempt to see patterns in the past and recognize the future. As a technical analyst, I believe that certain technical patterns can repeat themselves. However, fundamental patterns take much more convincing.
Besides the fact that not everyone enters the market with the same amount of capital or invests in the same securities, the advancements, power shifting, and globalization of the economy has dramatically changed (and will continue to change) our markets, making it foolish to draw comparisons between events in 1928, 1958, and those in 2008.
For crying out loud, there weren’t even personal computers in 1958, let alone discount brokers that have allowed the entire computer-and-internet-literate population to buy shares of stock. According to recent advertisements, even a baby in front of a webcam can place a trade with his blackberry.
Did the tech boom, the unwanted oil boom, and the ensuing… well, “boom” of financials falling flat on their faces show us nothing? That stuff hadn’t happened before. You can’t compare those events with many things in history, which is why such volatility, fear, and unpredictable market activity became (and still is) rampant.
So why is 10% so wrong?
Let’s say that most people who consider themselves investors will invest money in the market for a period of 20 – 50 years or so.
Let’s look at the return for a few 30-year stretches (of the S&P 500, a reasonable index to match general market returns).
From 1950 – 1980, the average yearly market return was approximately 7.25%. From 1970 – 2000, it was about 10.2%.
What’s the big deal? That’s not so far off.
The problem lies in the underlying statistical analysis of these numbers. In any case, when you look at any stretch of time spanning 20 years or more throughout the history of the stock market, the standard deviation of these return percentages is a minimum of 15.25%.
This implies that (assuming we take the “10%” number that is thrown around so carelessly among financial advisors and the like) that 95% of the time, the market will return somewhere between -20.5% and +40.5%. That is an absolutely absurd gap.
How can this be construed as any level of predictability? Go to any business in this country and predict that their profitability or earnings will increase by somewhere between -20.5% and +40.5% and they will call security to have you escorted far, far away.
Why trade the market?
Please take the following statement to heart:
You must think differently in order to earn high returns.
My account is up 25% this month. This was not an accident, nor was it attained on one single trade. It takes a little knowledge, a little level-headed thinking, and a little common sense.
Don’t think like Margie.
I would like to comment on two ideas that are embedded (if not embroidered) throughout how-to books on trading. These two concepts have secretly cost investors more money than I could ever count in five lifetimes.
The first of these subjective concepts that novice investors are forced to interpret and follow is some rendition of the following sentence:
“Hold on to your winners, get rid of your losers.”
Easier said than done without a crystal ball or looking into the rear-view. Many investors take losses (or wins) too soon to let their ideas develop. Unless someone picks the absolute bottom for a purchase or the absolute top for a sell, he is going to have to hold the position against him for some period of time.
No one, including myself, can pick perfect tops and bottoms with any regularity. Instead, I would like to give you some actual advice:
When you get into a position, be it long or short, you obviously have some confidence in that position. What you must do is continually evaluate the situation as if you had absolutely no vested interest in it.
In other words, decide whether you would a) buy, b) not mind owning, c) would not want to own, or d) sell.
If, at any point, you are two or more letters away from you original position, you should think about getting out.
The second of these concepts that absolutely drives me bat-s*** crazy is some variation on the following statement:
“Don’t average into losing positions.”
Generally, I agree with this idea, however it comes with a large, large stipulation – that you are invested in one individual stock.
One stock, alone, can have bad news, a turn of events, or other unforeseen challenges that may only affect that company.
On the other hand, trading indices (such as the SPYs, BGU, or BGZ that I have mentioned in previous articles) can offer you the benefit of minimizing company risk. To put it simply, averaging into these positions is actually an exceptional idea in my opinion. This is because if these ETFs crash, go to zero, whatever – we have a hell of a lot more to worry about than our investment account balances.
Remember this – if you’re going to make moves in the market, look at prices and events objectively. The market does not care who you are, what your position is, or how you got there. Best of luck as we await another bailout event.
John K. Whitehall
Analyst, Oxbury Research
Disclosure: no positions
