BUY LOW, SELL HIGH, GO SHORT & COVER
Are You Sure?
Starting in the late 1960’s the mutual fund industry picked a simple truth to shove down investor throats. To buy stocks for the long term and to keep adding money to their coffers month after month and year after year. And according to most people in the investment industry, this simple strategy should outperform the market over the long term, yielding you just enough moolah to fully enjoy that awesome retirement in Boca Raton. And if you play your cards right you might even have enough investment gains to be able to afford early bird dinner specials until you are 100. Today, so very few people question this investment approach that the “truth” above might as well be recorded in the New Testament as the Gospel of Goldman Sachs.
As accurate as this investment premise might be, it is a well known fact that most investors fail to beat the market on the consistent basis. Mutual fund or not. Plus, the stock market history does not support the premise above. Did you know that between 1899 and 1949, a 50 year period of time, the Dow went up just 185%. That would yield an annual compounded rate of return of just 2%. The same thing happened between 1790 and 1860. A 70 year period of time. Between 1966 and 1982 the market declined 25%. Hell, we don’t have to go further than today to see how inadequate the strategy above is. With the market facing another bear leg (as of August 2014), the Dow is up just 45% since its secular bull market top in January of 2000. The Nasdaq is still in the negative territory.
Don’t get me wrong, for most passive investors; the strategy above is a fairly good one. Yet, investors investing in such a fashion over the long-term shouldn’t expect to earn much more than a rate of inflation or the yield on a 10-Year Treasury. In other words, the mutual fund industry will never make you any money. They will make a ton of money for themselves through various fees, but they will never make you rich. If you want higher returns you have to take risks by dismissing the gospel above and by venturing outside.
And what will you find out there in the wilderness? Three primary investment dogmas and a million different offshoots of each one. They are….
- Value Investing: The idea of value investing is a fairly simple one. To find and purchase stocks that are selling well below their intrinsic value. Minimize the risk as the risk of the value stock going lower diminishes due to its general undervaluation. If you play your cards right and identify stocks that are not only undervalued, but those that are growing fast or turning around, the return on your investment should beat the market by a large margin. For most value investors long-term holding periods are a must.
To Be Continued Tomorrow……
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