Stock Market Risk

[truespode]

See you are still talking about timing and I'm talking about time IN. I guess it is a different perspective.

Take any 20 year period and you will make money if you keep your money in and have a diversified portfolio.

If you feel it is a game then that is fine. I consider the stock market an investment option that will yield positive results for my money over the next 20 to 30 years.

Ivan

 

[geremacheks]

As I recall, you were the one that posted the original timing example.

Your second paragraph has no warranty, and is actually quite dangerous. A diversified portfolio isn't the answer. So many people have recently realized this. The most important point is being on the right side of the trend. Did you miss all blue chips stocks in so many diversified portfolios that recently went bankrupt? This has been going on for the 30 years plus that I have been in the market.

But what do I know. I just trade the market for a living. Good luck.

 

[gwcrim]

Ivan, you're right. If you leave the money in for 20-30 years, you ought to have a decent return. BUT imagine the impact on those returns if you had bought in early October of this year vs. mid May.

In my job I see two kinds of investors. Those who do it for fun and those who do it for profit. No, investing isn't a game.

 

[linusb]

Geremacheks: Being diversified is the main tenent of ANY investment strategy...especially equities. By being diversified, you virtually eliminate unsystematic risk.

It is important being on the right side of the trend. However, determining when the general market, industry, or sector has reversed its trend is generally impossible in my opinion. I've taken courses on technical analaysis and whether you believe in candlesticks, head and shoulders, or tin men, it all equals a guessing game in the end. Sure you can show charts that show specific patterns followed by a certain trend. What technicians won't show you are the charts with the same pattern that produced a totally opposite trend.

Take right now for example. Is the bear market over? Has a new bull market started? You don't know and neither do I. Trying to *guess* is a fool's game. Dollar cost averaging for the long term is the absolute way to go. Any professional investment specialist will tell you.

The fact is that *NO ONE* except for a few high profile investors like Warren Buffett and Peter Lynch have REGULARLY achieved greater returns than the market average. It is believed that Buffet and Lynch have regularly achieved greater than average returns by way of an anomoly that given the sheer number of professional investors, statistics would provide that a few would achieve this record of abnormal returns. I don't know anything about your claim about trading stocks for a living but unless you have at least a 10 year record showing abnormally high returns compared to the market average, then I'd say you have no business giving advice on how to time the market and identify "trends."

 

[gwcrim]

Take right now for example. Is the bear market over? Has a new bull market started? You don't know and neither do I. Trying to *guess* is a fool's game. Dollar cost averaging for the long term is the absolute way to go. Any professional investment specialist will tell you.

What Vic and I are espousing isn't trying to tell where the market is going so much as it is determining the risk level of the market in general and in my case, different industry sectors.

There's nothing wrong with dollar cost averaging. It's great for starting to build a nest egg. But again, the person who didn't buy anything when the bubble was so obvious is better off than those who did. There are some mutual funds that are down close to 80%! Now that the risk is very low (and yes, risk is measureable) that same person can invest all their accumulated monthly 401-K contributions instead of what's left.

Then again, there are some folks that are beyond dollar cost averaging. The larger the portfolio the less one should even consider the plague of mutual funds.

Is it a Bull or Bear? That's not important to me. I know we're in a strong uptrend from a position of low risk. Now is the time to buy. Guess it's just an anomoly that I was 100% in cash in early October!

 

[James]

Here's a big cliche: "Timing is everything!" Even if you wait and take all of your money out 20 years from now, that is still TIMING and look at it this way, you are betting it all on ONE DAY 20 YEARS FROM NOW.

Buy low sell high is as relevant now as it ever was.

Why dollar cost average as traditionally taught when you can simply buy when the stock is low and not buy high? Requires you to pay attention but it is easily done.

In my opinion, the "share value" of a mutual fund is an insignificant number and as a result, there is no benefit to dollar cost averaging a mutual fund. The key for funds is do they make a return or not. I think that funds are a good place to park money that you aren't going to actively invest or a good place to accumulate money through systematic investing. But I agree with GWCRIM that funds aren't the best choice for me anymore.

One problem with funds is that they often have too much money to invest and also have strict rules as to how they can invest (as mentioned previously). It is hard to buy and sell shares in such quantities favorably all the time with such handicaps. Example: Peter Lynch's Magellan after it became popular. This is why they close funds to new investors periodically. Also, a funds share price might be low because they just sold off a huge quantity of a losing stock. So if you buy in low thinking that fund is coming back you may be surprised.

Being diversified is a good strategy but only if you are diversified in good investments. Diversification for the sake of diversification isn't prudent. One thing I learned about being diversified across several funds is that the funds all seemed to have the same mix of shares. This was very apparent when Microsoft went through it's anti trust suit.

Here's a bad analogy, when you are looking for a job, do you apply to the entire job market or do you pick individual jobs? Similarly, why would you blindy buy into "the market" based on some index fund or an indicator.

Timing an index may not be lucrative as indexes are composed of a variety of unpredictable share values but I think timing individual stocks in quantites that individual investors would purchase can easily allow a person to outperform a similar portfolio of index funds. I let my lack of guts prevent me from making 500% on however much I chose to invest about a month ago. 500% for 1 month equals 6000% annualized. You won't make that on any index fund over the next 5 years. I still made 25% (300% annualized) on the deal so far but instead of timing it, I chose buy and hold on that one. Like gwcrim said, when it is time to do it, you have to do it. I did the research, I saw the trends, I knew it was at an all time low with almost nowhere to go but up, I knew the company was solid, and I let the emotion get in the way.

Simply put, there is a passive way to do it and an active way. Passive is stuffing it away every month and taking it out 20 years from now. Active is managing your portfolio day by day or week by week etc. I don't think it has been proven that either is right or wrong in all cases.

 

[Tony Eeds]

James - You make some very good points.  I have some IRA and 401K $$$ that have been around a long time, and now that I am self employeed, I have a SEP that I fill to the max every year.

With all of that being said, I have found it difficult to find someone, that I could trust to help me learn the ropes.  There is probably nothing wrong with setting up your retirement and passively watching it grow.  Many folks have many "underfunded" pension funds (both corporate and union) that fit into this catagory.  This is no different than SS, which is underfunded as well.  It may cost me a trememdoous amount in penalities, but I can cash out and touch "my" money if I so desire.  Don't get me wrong, I don't want to do that, but it is clear to me that it is my money and I should be more involved making sure it is working at least as hard as I am.

I have spent many nights reading about the market in countless magazines and all I have learned to date is that there is a foreign language to stocks that devulge secrets that I can't see or hear.  I listen to CNBC when I am on the road, but am getting tired of the fact that they often treat investing like it is a contact sport (not that many folks haven't been bruised by it lately).  I made a prediction in an earlier thread on this subject that the market would float around and languish until after the election and then it would "magically" begin an upturn, regardless of who won.  In the near term, I have been correct, not that the observation means much.

An aside - I still wonder about how much of the $800K that the lady tearfully reported losing to congress because of the Enron collapse was really "her" money and how much was the speculative pressure that drove up the overallvalue of her "real investment' to the $800K figure.  It may have made good press watching her cry and Teddy and Joe wring their hands, but congress has proven all to many times to me that about all they can do is corrode confidence in the economy and the markets.

I recently read an essay by Phillip Bobbit in Time (Getting Ready for the Next Long War - Time, Sept 9, 2002) that described a fundamental shift in the entire structure of the world political power structure from sovereign states to a new concept of market states, sovereign states and virtual states.  Indeed, in the writers opinion, America has already trancended much of the way to a market state, where the business economy has trancended the normal political boundaries and traditional sovereign states can no longer "control" them.

Understanding this trend (assuming you agree) and being able to act on it are the promise for the future in investing, in my opinion.  Many people accumulated wealth in many decades of our American history.  Some by accident and some by design or vision.

It is the minutiae that I don't grasp ....

Tony

BTW - Keep up the dialogue.  I, for one, am learning a great deal.

 

[Vic]

Originally posted by Truespode
Only fools (in my opinion) try to time the market.

Not surprisingly, I hold the completely opposite opinion. And, I'm the fool with accounts making all time highs.

If you were buying at the highs in 1929, it would have taken 25 years just to break even. Of course, I may be a fool to think that something like that could happen again.

Buy 'em when they're sellin' and sell 'em when they're buyin'.

 

[gwcrim]

.... I let the emotion get in the way.

That says a LOT. Greed and fear. They are the two biggest enemies of the average investor. And as humans, we just can't shake them. It's VERY important to develop a sell discipline. Very, very, very important. Anytime you make an investment, you MUST know in advance the up and down points at which you will begin to liquidate! Believe me, people are much more open to this idea now than they were a year ago.

There is a very good possibility that the market could go sideways for several years. Look at the '70s. In this type of market, the only way to make good gains is to spot peaks and valleys and play them as such.

One problem with funds.....

....is that they typically SUCK. :)

Diversification via funds is tough. Consider the manager of a financial fund during the tech boom. He could have bought Microsoft using the rationalization that banks use computers that all use Windows. Or even more plausible as James noted, all your basic "growth funds" own the same stocks.

If you're interested in chasing sectors take a look at i shares. I'm still gathering info on them, but I think they are managed with more discipline than the typical retail funds.

Gotta run. T-day calls. Be thankful that we all have the discretionary income to own motorcycles, computers, and equities!

 

[truespode]

Originally posted by Vic


Not surprisingly, I hold the completely opposite opinion. And, I'm the fool with accounts making all time highs.

That is fine. My opinion is different and if you look at the majority of research out it points to the diversification model and the return of investment over time.

I know many investment managers who share my same philosophy and their clients have portfolios that are still making a profit. I'd rather stay IN the market over time then try to time it.

Now is a good time to get in it for sure... but being in it over a long period of time and letting your money work for you is much more important than playing a game with it.

Ivan

 

[truespode]

Originally posted by geremacheks
But what do I know. I just trade the market for a living. Good luck.

And the people I have been learning from have been managing investment firms for over 40 years. What do they know?

There are different philosophies to this. Mine is to buy, diversify to help against the risk and keep your money in. It is what I have been taught and it has been shown to work for many people who make a living at studying the market.

Ivan

 

[truespode]

Originally posted by gwcrim
The investors biggest enemy is emotion. Greed and fear.

I agree 100% with that.

I'm a cold hearted ba$tard and a smarta$$.

You and me both.

Ivan

 

[gwcrim]

Here's a question for ya Ivan.

Let's say that in the late 80's to early 90's you bought Xerox @ $15 (split adjusted.) Well known, profitable Blue Chip kinda name. It had a fabulous run up in the mid to late 90's. Gotta love that!

But now it's at $8 off a high of $60 or so. And this scenario doesn't even touch on the 'Net Bubble madness.

Do you ever sell?

 

[linusb]

If you own an index fund you don't worry about when to buy and sell. The goal is to accumulate sufficient wealth over an extended period of time (by regular contributions and a sufficient rate of return) so that you can make periodic withdraws at the stage in your life when it is time to supplement your income.

Judging from your posts, I'm guessing that you probably have a preset exit point either up or down when you make a trade. Many traders seem to set a 10-15% loss as an automatic trigger point. Sounds good in theory, but a few bad trades and you've racked up a pretty significant loss in a short period of time.

Short term moves in the market are unpredictable. That is fact. If it was predictable, everyone would be able to get rich quick and easy. Some people get lucky and do get rich quick just like people who win at the lottery or casino. There are countless books on various stock trading systems, yet none have been proven to consistently provide returns greater than the market average. Why is this?

 

[gwcrim]

Linus you have a plan. That's better than most people.

In addition to my other wonderful characteristics, I'm egotistical enough to believe that I can do better than average. :moon:

 

[linusb]

LOL. So do I. Unfortunately I haven't been able to in the last 2 years. My two accounts that I've traded frequently have dwindled to chump change. Recent upturn has me feeling slightly encouraged. I failed in that I was always apprehensive about sidelining my money. I like the CANSLIM model of stock picking and should have abided by the rule of going long only when the rest of the market is trending up. I'm long OCA and CSCO right now. Made some money on OCA a few years ago and I hope to do a repeat.

 

[Vic]

Originally posted by Truespode
And the people I have been learning from have been managing investment firms for over 40 years. What do they know?

How to recruit clients.

Originally posted by Truespode

Now is a good time to get in it for sure...

Compared to when?

 

[truespode]

Originally posted by gwcrim
Do you ever sell?

Yes. Adjustments are normal.

Trading daily and playing a game isn't.

Ivan

 

[gwcrim]

I certainly don't recommend trading daily nor playing games. I recommend portfolio managment.

So we agree that there are times to sell. How do you determine when you sell?

 

[truespode]

Originally posted by gwcrim
I certainly don't recommend trading daily nor playing games. I recommend portfolio managment.

In that case I believe we had a mis-communication. I thought you were advocating day trading or peak guessing. Adjustments happen with a portfolio and if you get scared and just start selling or trying to guess you get in trouble. I believe it is much better to have a well researched and diversified portfolio instead of letting fear drive you.

So we agree that there are times to sell. How do you determine when you sell?

Depends on the P/E ratio. If the company is earning money but the stock is dropping I am not too worried. It is when we have companies that have a stock that is soaring but no earnings to back it up that have me worried. Like the dot coms, when they drop they'll drop in a hurry.

I think a balanced portfolio helps you with those issues though. If you have researched the companies, funds and other investments you can handle the dips in the market. Over time staying in the market is not an insane risk.

Ivan

 

[gwcrim]

I believe it is much better to have a well researched and diversified portfolio....

Let's hear a big AMEN. "Well researched." In my case that includes Technical Analysis as well as Fundamental Analysis.

Over time staying in the market is not an insane risk.

For the most part you are correct. But as with everything else in life, there are exceptions. As many folks are now painfully aware, there are times that moving from equites to cash (or to another equity) is a great idea. I hope you can agree.

When all the indicators (at times even including common sense) point that the market is WAY over priced and beginning to slide away, the prudent thing to do is move the offense to the sidelines and put the defense on the field.

IMO, no one should have even been buying 90% of those dot.gone stocks. When the prospectus says that 'the company has never earned any money and may never earn any money' only a fool would invest in it. But I couldn't stop them. And believe me, I tried. Instead of the old Flip Wilson line "The devil made me do it" I kept hearing "CNBC made me do it!" :p

 

[truespode]

Originally posted by gwcrim

I hope you can agree.

Looking back after this post I see your viewpoints with a different light and agree. I was thinking you were promoting more of a guessing game. With my newfound interest and education in the market comes some misunderstandings with the written words... I'm sure if we were face to face discussing this we would be more in tune.

When discussing things like this I have to be careful NOT to get caught up in the argument (proving my side) more than listening and seeing if we are just mis-communicating. I still hold true to time in the market instead of timing the market but now I see that what I was saying isn't as different from you as it appears.

The origin of this post is stock market risk and I do not see the market as a risk if you take the time to look at the items you invest in. Once invested, don't let fear or games make you start moving your portfolio around too much. Let research and understanding guide the adjustments you make but just b/c the dow drops 100 points doesn't mean you have to make a hasty decision.

I think too many people lose b/c they are too hasty to think the exception should be applied at every dip instead of looking at why they invested in a certain item in the first place.

One thing I'm curious of now is bonds... I think too many people are moving towards them. When interest rates go up the underlying value of a bond goes down (from what I have seen and been shown). With interest rates as low as they are I'm surprised to hear people recommending bonds right now. I have heard one person tell me he thinks the bond market will have a fall similar to the dot com fall.

I am curious how that will pan out.

Ivan

 

[gwcrim]

With interest rates as low as they are I'm surprised to hear people recommending bonds right now. I have heard one person tell me he thinks the bond market will have a fall similar to the dot com fall.

I don't typically recommend bonds for profit. They're for income. (And I wouldn't recommend ANY bond fund even if you held a gun to my head.) If you buy and hold to maturity, you should have no surprises at all. But going long term right now is pretty foolish unless you are very old. At that point buy the biggest yield you get and enjoy your income.

However, I have been placing some very short term lower quality bonds in just about all types of accounts. Earlier this year it was AT&T w/a 2 year maturity and a 9% yield. Last month I had some Levi Strauss bonds with a 13 month maturity and a 15% yield. Yes..... 15% yield to maturity in 13 months! This month it's PSEG 15 month maturity w/a 15 month yield of 11.5%.

All of these bonds are borderline junk. But they were all being sold in a knee jerk and represented a great bargain considering the time/risk and stature of the issuer. I fully research the situation and explain the risks to my clients. But considering other investment options, most folks feel comfortable with a small exposure. There's far more certainty in them than in equity returns and far more income than yer basic CD.

YMMV, of course.

 

[truespode]

That is exactly how I feel about bonds... income. I just find it odd how so many people have asked about moving to them. Just another example of fear and jumping ship without research.

Ivan

 

[Green Horn]

Hey, are you two lovebirds about done neckin' here?? :)