By John Reizner |
Many people who place their money in the stock market are really traders rather than investors. In fact, I do not think that there are too many long term investors left after what has happened to the market in since September 2008, when the Dow Jones has fallen 6,000 points to 7,500. Long term investing has been somewhat discredited and both a well known financial commentator and an often interviewed hedge fund manager have declared end of such an investing style. See my article to the contrary: Why Long Term Investing in the Stock Market is not Dead.
But is not that the time, when the stock market has fallen over 40%, to prepare oneself for investing in that well-managed mutual fund, or that select group of high quality stocks? There are of course no guarantees. And much depends on the wisdom of the economic policies of the Obama administration. But if those economic policies are not fiscally reckless, or even anti-capitalist, the market may rally at least up to its 200 day moving average.
It is rather remarkable, however, that since the inauguration when Barack Obama assumed the Presidency, the KBW bank index has fallen over 30%. On inauguration day alone, the index plummeted 19%. It appears however that parts of the President's housing recovery plan may have the effect of inserting the government into the banks' mortgage business as mandated renegotiations of mortgage contracts and means testing for certain homeowner's mortgage payments squeeze many banks further. Of course, many large banks are accepting federal bailouts and thus are partially nationalized.
Back to the point: traders are usually hunting for short term profits, measured in days, hours, minutes, or even seconds. Given my experience in investing in stocks and mutual funds primarily with the method I describe in my book, I have made a respectable sum of money through accumulating profits from positions over long periods of time, and certainly more than I could have scalping quarter points. I recall how during the height of the dot-com mania shortly before the millennium (which marked the final throes of the long term 1982-2000 bull market), people were quitting their jobs to become day traders - a move that turned out to be unwise.
It was my belief even before the recent credit crisis, derivatives blow-up, hedge fund redemption wave, that some hedge funds celebrating ultra short term trading strategies were not truly benefiting their investors.. I wrote back in March 2007, Hedge Funds: Four Reasons Why You Should Not Invest in Them, that these funds in some cases benefited the organizers and the managers and many did not excel for their investors.
Hedge fund managers may need to be supermen for the client to consistently make money over a long period of time given all the fees usually levied on their investors. The average man or woman who may not have access to high minimum entry hedge funds may be better off investing on the side of Warren Buffett (and that is what I say in my book) than with a hedge fund manager. Yet, there are players out there who trade long and short for a living and deliver superior results over a period of successive market cycles.
I think the odds of winning by investing for the long term are usually greater than by trading by the second, hour, day or week. There are also tax benefits to long term investing where time is your ally. I believe it may be useful to keep a long term perspective for at least a chunk of your portfolio. The stock market has gone down before more than 40% (as it has recently): in 1973-1974, which was a fabulous buying opportunity.
On the other hand, there is no doubt that the long bull market in stocks culminating in 2000 represented a bubble in stocks. And that was followed by a bubble in housing which turned into the subprime mess/credit crisis. The 2003-2007 stock market rally was a long snapback event in this bear market scheme. We are now in the midst of a long term bear market in stocks that is going into its ninth year.
The 1929-1932 bear market decline during the Great Depression measured about 85%. Since our current government now appears to be somewhat anti-business, our stock market may continue to decline and even our dollar may fall accordingly.
But, as the late John Templeton was reported to have said, "in the last century and the next, it is still buy low, sell high." So be an investor rather than a trader and look for investing points into the stock market at what may appear in ten to fifteen years to be very cheap entry levels.