Buy Low, Sell High, Go Short & Cover

Continuation From Yesterday…...(The Gospel Of Goldman Sachs)

Growth Investing: For the most part, growth investors are not concerned with finding undervalued securities. In fact, in most of the cases and for a lot of the growth investors’ valuations become somewhat irrelevant. Only the growth of the underlying business is all that matters. This approach presumes that if the underlying business continues to grow fast, the stock price will continue to appreciate much faster than the overall market. Yielding market beating results. Yet, this approach carries inherently more risk when compared to value investing. For instance, should the company disappoint in their growth trajectory, investors can find their stocks tumbling down 20-50% or more in a matter of days, if not hours.

Active Trading: This particular approach to the market is inherently more difficult to define as it contains millions of different strategies. Everything from simple day trading to using supercomputers to run complex algorithms to trading based on planetary movement. It is highly probable that each individual trader who is serious about participating in financial markets will have his or her own strategy. Developed though years of experience and trial and error. Understandably, the amount of risk each trader takes depends entirely on the strategy used. Yet, one truth reigns supreme in this category as well. Most traders fail to outperform the market. What’s more, a high percentage of people who attempt to make a living through this craft get washed out in the first few years. Due to losses, inexperience and unwillingness to improve on their skill.

So, which investment approach is the best for our newly enlightened investors?

We’ll get to that in a second, but before we do there is yet another intricacy that you should be aware of. Whether it is the mutual fund industry mantra of buying and holding forever or any of the investment approaches above, they all have one thing in common. Most investment approaches are Long Centric. In other words, most investors invest only in anticipation of rising markets or higher stock prices. Completely disregarding the other half of the equation. That stocks do fall. Sometimes substantially so and sometimes they do so over extended periods of time.

A bear market of 1966 to 1982 gives a perfect opportunity to see just that. The Dow topped in 1966 at around 1,000. Over the next 16 years the market proceeded to oscillate up and down, yielding negative results and at least three gut wrenching sell offs of 30-50%. When a bear market ended in 1982 most investors had nothing but a 25% loss to show for their efforts.

Yet, this devastating loss of time and capital could have been entirely avoided if investors concentrated on both sides of the equation. Long and short. Instead of sitting and waiting for the stocks to appreciate over the long-term, investors should have moved with the market. Going both long and short as the market oscillated during that time.

The problem is, the same mutual fund industrial complex has drilled a certain thought into investor’s minds. That short selling the market or individual stocks is not only inherently more risky, it is darn un-American. In fact, every single time the market sells off or corrects, just as it did in 2000-2002 and 2007-2009, there are loud calls to either curb or outright ban short-selling. Mostly due to the misinformation that short sellers are causing the underlying collapse. In fact, financial medial oftentimes portrays short sellers as outright criminals who should be grouped together with murderers and be shipped off to prison. Better yet, Siberia.

To Be Continued Tomorrow……