Stock Market Investing - Santa Claus Isn"t Real
Most adults know there is no Santa Claus.
Parents hold back on telling their kids that Santa Claus doesn't exist.
In fact, oftentimes they don't even tell their kids; they let them learn about it on their own, usually from a sibling or a friend.
It's bad enough at five or six years old to learn that Santa Claus isn't real, but imagine if you were in your 40's, 50's, or even 70's before learning this hard fact of life.
What belief do investors have that is the equivalent of Santa Claus for a five-year-old? It's a belief that isn't just lightly floating out there in the investment world, but is carved into granite everywhere.
Do you know what this belief is that just isn't so? Here it is: The belief that "buy and hold" is the way to grow your money.
After all, isn't it true that if you are not in the market, you cannot win? Right.
If you don't play, you can't win.
This is what the big investment houses of the world want us to believe.
Here is the problem: Santa Claus doesn't exist, at least not the one that lives in the North Pole and delivers billions of presents to the world's kids in one night.
If he were able to do this, his sled would have to be traveling faster than the speed of light to make all those deliveries, even with magic reindeer.
But we know that flying reindeer and Santa Clause don't exist.
Buy and hold doesn't always work.
There are periods of time when buy and hold really hurts the investor.
One needs to know when those periods are.
You have to recognize when we are in one of those periods when buy and hold is dangerous.
Buy and hold, or buy and hope, as some people call it, is when an investor buys a stock or an investment and holds it forever, with their only plan being "I'm going to hold it.
" The problem with this is the assumption or assumptions that are being made.
In the last 100 years, there have been four periods when the buy-and-hold strategy not only did not work, but cost investors money.
From 1905 to 1921, buy-and-hold investors lost money (P/E 19 to P/E 5).
From 1929 to 1950, buy-and-hold investors lost money (P/E 29 to P/E 10).
From 1966 to 1982, buy-and-hold investors lost money (P/E 21 to P/E 6).
From 1997 to 2009, buy-and-hold investors lost money (P/E 35 to P/E 15 and still dropping).
The first thing to take note of is how long these do-not-buy-and-hold periods are.
The shortest one is the most recent one, but it is probably still forming.
Other than the most recent one, you will notice the shortest time period is 16 years, with the longest being 22 years.
And that doesn't include calculating inflation into these numbers.
Wall Street is adamant about buying and holding.
What they say about buying and holding is true; that is, over the long run, a buy-and-hold strategy will work.
The question is, in comparison to what? Here is the main glitch in that strategy: Over the long run, our life expectancy will catch up to us.
The primary way Wall Street brokers make money is by having your money in the market, in mutual funds.
If your money is not in the market because it's too risky, then these companies have entire decades when their income gets cut by 50% to 75%.
That can never be allowed, especially considering that many of these companies are publicly traded.
They have to have your money in the market in order to capture their large fees.
Most people trust and like their brokers.
But investors must realize that if their trusted advisor is only suggesting a buy-and-hold strategy during a long-term secular bear market, then their purchasing power and wealth is going to be drastically hurt.
Here is a simple way to tell if we are in a buy-and-hold period or a limit-your-loss period.
Refer to the above numbers again.
Look at the end of each sentence.
Do you see the P/E numbers? "P" stands for the price of the stock, and "E" stands for the earnings or the profit of the stock.
Together, they are called the price-to-earnings ratio.
When this ratio is rising over time, like from 1982 (P/E ratio of 6) to 2000 (P/E ratio of 44), you would have wanted to be in the market and fully invested.
But when it is falling, like from the 1966 P/E ratio of 21 to the low P/E ratio of 6 in 1982, you do not want to be in the stock market.
There are many different P/E ratios.
There are pro-forma, core, operating, trailing, forward, and reported earnings.
The only one of these that matters is the reported or, as it's sometimes called, the "as reported.
" The reported earnings number is the number the business reports to the IRS.
Basically, it's the number that is the most accurate.
And it's the one you should use to check the direction of the market's P/E ratio.
Parents hold back on telling their kids that Santa Claus doesn't exist.
In fact, oftentimes they don't even tell their kids; they let them learn about it on their own, usually from a sibling or a friend.
It's bad enough at five or six years old to learn that Santa Claus isn't real, but imagine if you were in your 40's, 50's, or even 70's before learning this hard fact of life.
What belief do investors have that is the equivalent of Santa Claus for a five-year-old? It's a belief that isn't just lightly floating out there in the investment world, but is carved into granite everywhere.
Do you know what this belief is that just isn't so? Here it is: The belief that "buy and hold" is the way to grow your money.
After all, isn't it true that if you are not in the market, you cannot win? Right.
If you don't play, you can't win.
This is what the big investment houses of the world want us to believe.
Here is the problem: Santa Claus doesn't exist, at least not the one that lives in the North Pole and delivers billions of presents to the world's kids in one night.
If he were able to do this, his sled would have to be traveling faster than the speed of light to make all those deliveries, even with magic reindeer.
But we know that flying reindeer and Santa Clause don't exist.
Buy and hold doesn't always work.
There are periods of time when buy and hold really hurts the investor.
One needs to know when those periods are.
You have to recognize when we are in one of those periods when buy and hold is dangerous.
Buy and hold, or buy and hope, as some people call it, is when an investor buys a stock or an investment and holds it forever, with their only plan being "I'm going to hold it.
" The problem with this is the assumption or assumptions that are being made.
In the last 100 years, there have been four periods when the buy-and-hold strategy not only did not work, but cost investors money.
From 1905 to 1921, buy-and-hold investors lost money (P/E 19 to P/E 5).
From 1929 to 1950, buy-and-hold investors lost money (P/E 29 to P/E 10).
From 1966 to 1982, buy-and-hold investors lost money (P/E 21 to P/E 6).
From 1997 to 2009, buy-and-hold investors lost money (P/E 35 to P/E 15 and still dropping).
The first thing to take note of is how long these do-not-buy-and-hold periods are.
The shortest one is the most recent one, but it is probably still forming.
Other than the most recent one, you will notice the shortest time period is 16 years, with the longest being 22 years.
And that doesn't include calculating inflation into these numbers.
Wall Street is adamant about buying and holding.
What they say about buying and holding is true; that is, over the long run, a buy-and-hold strategy will work.
The question is, in comparison to what? Here is the main glitch in that strategy: Over the long run, our life expectancy will catch up to us.
The primary way Wall Street brokers make money is by having your money in the market, in mutual funds.
If your money is not in the market because it's too risky, then these companies have entire decades when their income gets cut by 50% to 75%.
That can never be allowed, especially considering that many of these companies are publicly traded.
They have to have your money in the market in order to capture their large fees.
Most people trust and like their brokers.
But investors must realize that if their trusted advisor is only suggesting a buy-and-hold strategy during a long-term secular bear market, then their purchasing power and wealth is going to be drastically hurt.
Here is a simple way to tell if we are in a buy-and-hold period or a limit-your-loss period.
Refer to the above numbers again.
Look at the end of each sentence.
Do you see the P/E numbers? "P" stands for the price of the stock, and "E" stands for the earnings or the profit of the stock.
Together, they are called the price-to-earnings ratio.
When this ratio is rising over time, like from 1982 (P/E ratio of 6) to 2000 (P/E ratio of 44), you would have wanted to be in the market and fully invested.
But when it is falling, like from the 1966 P/E ratio of 21 to the low P/E ratio of 6 in 1982, you do not want to be in the stock market.
There are many different P/E ratios.
There are pro-forma, core, operating, trailing, forward, and reported earnings.
The only one of these that matters is the reported or, as it's sometimes called, the "as reported.
" The reported earnings number is the number the business reports to the IRS.
Basically, it's the number that is the most accurate.
And it's the one you should use to check the direction of the market's P/E ratio.
