I got some really good inside trading advice today from the wonks at CNBC. They told me to buy low and sell high. Imagine that! They also said that in the long run stocks tend to go up, so NOW was a great time to buy, because odds are the market is near a bottom and by some mystical magical powers of wonderment it would only go up.In case you can’t tell I’m being facetious. Even before my day trading career began in earnest, I was NEVER a huge fan of buy and hold, I absolutely loathe holding stock for more than a quarter (as a long term investment) and I think anyone recommending it is negligent. Think about it. Say you want an 8% return for the year and decide the best way to do that is to with a blue chip, so you pick McDonald’s. Over the course of the year you net $80 on a $1000 investment, good right? Not exactly, there are two problems with this type of thinking:
1. Timing isn’t Luck: MCD stock was actually up 15%, almost double your returns, a quarter and a half into your investment, but because of your buy and hold strategy you missed out on an extra $70. Or, MCD could have tanked after your purchase and without a cogent ‘cut your loss’ strategy in place you played with hope and lost %50.
2. Opportunity Cost: While the $1000 was sitting stagnant in MCD, other companies like Apple, Google and Delta Airlines were all over the place, offering the chance at greater returns on spike.
3. Someone’s Long Run: Remember the downturn is always someone’s long run. At 55, there was a person who, 10 years ago, was advised to invest with Microsoft for the long run, with the promise that Microsoft would be higher, and thus provide significant return when they retired. Surprise! If you bought MSFT in November of 1998 you bought it at around $35. It closed today at $22. Discounting the theory of the time value of money, you lost 37% (if you we apply that theory you lost more). That’s a loss of $370 for every $1000 invested. Probably not what a retiree was expecting.
The last point is especially powerful, again because of all the hype you hear about buying and holding because stocks are so cheap. There is no guarantee that the market will EVER return to its previous levels. What people don’t understand is that the 14,000 point Dow was fueled by the ersatz “housing economy” which was in turn fueled by false money. Assuming that we will naturally return to that level at some unnamed undetermined point in the near future is pure conjecture.
