Monday, March 5, 2012

My Best Stock Investing Advice ... Do the Opposite of What Most Individuals Do

Main Street's $100 Billion Stock-Market Blunder says a lot about why most individual investors don't do themselves any favors:

"Back in the spring of 2009 I was approached by a middle-class investor in a panic. She had dumped all her stocks in the fall of 2008, following the Lehman Brothers collapse. She just couldn't stand watching her life's savings evaporate before her eyes. By the time we spoke, the stock market had already rallied sharply, but she was too afraid to jump back in. She just didn't trust it. I couldn't coax her. She was terrified.

It's a typical story, and the results are plain to see. Last week, the Dow Jones Industrial Average hit 13000 for the first time since the crash. It has recovered most of the ground lost from the peak. When you include dividends, someone who invested on the day before Lehman collapsed is now up a remarkable 18%. If they invested at the lows three years ago, they have doubled their money.

But for all the cheering on Wall Street, there's a sorry tale behind the headlines.

While we've seen a stock-market boom that has made plenty of people rich, much of Main Street America has missed out. Instead of buying, they've been selling. The few moments when they've steeled themselves and turned buyers have been, on the whole, the worst times to do so.

In total, over the last five years the investors in ordinary domestic mutual funds have withdrawn $490 billion from the U.S. stock market, according to data compiled by the Investment Company Institute, the industry trade group. There have been only a few brief periods during which they were buying. The first was the spring of 2008 -- just before the market collapsed. The second was the spring of 2009, after the stock market had already rallied. The third was the start of last year, shortly before the market slumped again. . . .

{W}hen it comes to the U.S. stock market, the picture remains stark. The public has done the wrong thing with astonishing consistency. . . . you could actually have made money just by consistently doing the opposite of the public."

Discussion, Analysis and Recommendation

Most people do the wrong thing when it comes to investing; they buy high and sell low. They resist buying "on sale" and instead only buy at regular or even higher prices. I guess it's just a feature of our all too human nature. So let's find a way around it.

Too often individual investors act when they should remain passive. And remain passive when they should act. But how is the individual investor to know when to do either? To be candid, he can't.

To be an in-and-out market timer means the investor has to be right two times. He has to know it's time to buy or sell before the market is about to go up or down, as the case may be, but that's not good enough. To complete the process, he then has to know when to sell or buy, as the case may be, at a later time.

It would be at least extremely lucky for any individual investor to get the buying or selling decision right one time. To do it twice would be a virtual miracle for us amateurs.

When investing for the future, let's always remember that it's best to know enough to leave miracles out of the decision making process. Hope is always a bad strategy.

So based largely on my self acknowledged ignorance, I always try to stay with the long term trend and remain invested in both good times and bad. Even though I do make some investing moves from time to time, I'm basically a boring investor. Maybe even lazy.

No matter what anybody tries to tell you, it's best to remember that market movements simply aren't predictable in the short term. American film producer Samuel Goldwyn got it almost right when he said, "I never make predictions, especially about the future."

I'd amend Goldwyn's comment only slightly to say that it's not worthwhile to attempt to predict the market's short term future. Accordingly, if you will need to withdraw the investment money soon, don't buy stocks.

In 1980 gold and the Dow both sold for ~$800. Today gold is ~$1700 and the Dow is ~ $13,000. Not even close. Yet most people believe gold has outperformed stocks, and for limited periods of time, it certainly has. And will again from time to time.

The market fluctuates a great deal in the short term. For instance, from its 1980 level of 800, it tripled by 1987. Yet 1987 also was a year in which the market fell by 23% on one October day.

By 1991, it had reached a new high of 3,000, then 4,000 in 1995, 6,000 in 1996, 7,000 and 8,000 in 1997, 9,000 in 1998, 10,000 in 1999 and 11,000 in 2000.

Then 9-11 happened, down went the Dow, and it took until 2006 to reach a new high of 12,000, before climbing to 14,000 in 2007.

Then it was straight back down again. In 2008 it collapsed to 6,500.

Many people withdrew and have stayed away from stocks since then. Now the Dow is back at 13,000. A double from the recent lows of 2008.

The Crystal Ball

My guesstimate is that the Dow will reach 20,000, or another 50% increase from today's level, before too many more years have come and gone. And stocks will have paid cash dividends all along the way. And then 25,000 and up from there. That said, there will be drops along our way to new heights, so be prepared for some anxious times in the years ahead.

The takeaway for me has long been and remains a simple one. For patient individual investors, buy and continue to own shares of good companies, or the market as a whole, such as the S&P 500 index.

Most important, try hard not to get too distracted when the inevitable ups and downs and "once in a lifetime" crises occur every few years. The bad times will end and normal life will resume.

And over time you will have defeated inflation by enhancing the real purchasing power of your assets through solid investment returns from solid stock market performance.

That remains my best stock investing advice. And that's my own bet as well.

Thanks. Bob.

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