1 week Ago By Marc Cuniberti | Colunmist
In times like these, the stock market mantra of “buy and hold” just doesn’t seem to cut it. I know they also say “hold for the long term” but I, like the rest of you, don’t know how much “long” I have in my term. This especially applies to those of us who are a bit older.
I use the word “bit” with the proverbial tongue in cheek. In any case, those that have attended one of my investing seminars (there is one coming up in the fall at Placer College for Adults in Auburn) , I always tell the story of when I was a young trader and in 1987, in one day (called Black Monday) I lost a cool 45% of my account, roughly 180 grand. Let me tell you, that is not a pleasant feeling.
It stayed with me for months. I still get a stomach ache when I think about it. They say something good comes out of all things that happen to us.
I know that’s debatable, but one thing it taught me is to swear I would never have a “gave it all back” stock moment again. It was then and there I came up with the slot machine theory of investing. It means for the many of us that have played the “one armed bandit”, when people play a slot machine, most people exercise good money management.
Which is to say when they lose a certain amount they just walk away and go to the bar. On the contrary, many investors and advisors don’t follow that advice and instead adopt the “the market always goes up over time” mantra. It goes something like this: You make some money, or start out opening an account, and the market then drops 5%, and your advisor says (or your brain says), “ I’m only down 5%, don’t worry about it”.
Then the market drops 10% and you rinse and repeat that thought. Ditto down 15%, down 20% down 25%. Somewhere around 30% or more, you call your advisor in a panic and say “Hey Ed, I am now down a lot of money and I want to sell out”.
Basically you have reached your “get up and walk away” slot machine moment. The advisor (or your brain) then chimes in and says “You’re down too far, you don’t want to sell out now”. Hummm.
.. So if you use this strategy in Vegas sitting in front of some slot, you don’t walk away, but instead go back to the ATM and get more money.
That’s because “you’re down too far” and don’t want to quit now. Although some investors have the CAJONES to hold through thick and thin and watch their life savings evaporate, I am not one of them, and maybe you aren’t either. It is true, the market has a continually upward slope to it over the decades but there are a few issues with using that as an excuse to never sell your stocks.
Case in point: the recent months of this market rout may have wiped out a year’s gains or more. Indeed some stocks have lost 10, 20 or 30 percent. Another reason to get up and walk out of the casino of stocks is that it may take a very long time to recover losses or regain previous profits.
After the 1929 crash, it took 25 years for the Dow Jones Industrial Average to eclipse its previous high. The NASDAQ took 15 years to recover after the dot.com crash.
There are many more examples of long wait times to recover from a previous hammering. True, all those markets did eventually recover, but had an investor sold and just put those monies in the bank instead of hanging out in those floundering markets for all that time, the compounding interest on savings accounts or CD may have returned incredible gains compared to someone who just sat and “held for the long term”. In conclusion, there is a time to be in an asset and a time not to.
Had an investor at least taken some money off the table at market highs, and/or acted when markets began to sell off, and then bought back in closer to, or at a market bottom, the gains may have been many multiples higher than those who just “rode it out”. Knowing when to sell and buy is the trick, and having a clue as to what might precede or at least hint at turning points in the markets can take years of training and experience. I know the recommendations to “hold for the long term” are many, but in my opinion, come from those that simply follow the crowd and may not take the time to really study what is going on in the lobbies of American business and the ivory halls of both Wall Street and Washington.
Knowing what to do could be as simple as setting a limit of your losses when markets are correct. Simply use the slot machine theory of “I have lost enough money and am getting up and leaving the casino for now”. Either that or buy and hold for the long term and just keep holding through thick or thin.
And how’s that working out for you? “Watching the markets so you don’t have to”.
