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Author Topic: Why Buy and Hold Investing is for Suckers  (Read 1597 times)
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tamo42
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« on: 2011 Mar 04, 02:33:51 pm »



I sit here wondering how many people actually realize how important being knowledgable in the markets is. I often listen to Dave Ramsey's podcasts and hear his message on investing for the long haul in good growth stock mutual funds. I love Dave's advice on getting out of debt and living within your means, but I think the old buy and hold advice will lead people to a world of hurt.

The buy and hold proponent will of course respond with statistics like the market (represented by the Dow Jones Index) has averaged 11% since 1920 or some similar number. To which I say, yes, it has, but that is too narrow a time frame to consider.

I know, I know, it sounds ridiculous. We're talking about almost a century of financial history. How can that be too little time to consider?

Well, this is where you have to be an educated citizen of the world. What else has happened over the last century? Many people call the twentieth century the "American Century" because America rose to such prominence during this time. As a result, Americans became the richest in the world. These trends last over generations. If you rely on them to continue, you might just find yourself in the same position as the Brits in 1890. At that time they ruled the world. A few years later, the world looked entirely different and they no longer ruled it. Are Americans at a similar turning point now? Oh and don't forget that this has been the century of the Fed as well.

If you listen to Ramsey's talks, he'll actually address this point a bit. He basically says that if all the big corps represented in a big mutual fund start decreasing in value at the same time, you'll have much bigger problems than your portfolio performance. And that's true, but I say why put yourself in such an avoidable situation? How about instead of doing this kind of blind, set-it-and-forget-it kind of investing, you actually take responsibility for your own investment decisions?

Let's look at the last week in the Dow:

Mon 12226.34
Tue 12058.02
Wed 12066.80
Thu 12258.20
Fri 12111.00 (still open as I write this)

Down, flat, up, down. It's been quite the ride for the buy and hold guys. Plus everyone is starting to wonder if we're at a medium term market top. What is the buy and hold investor to do? Keep buying! Dollar cost averaging, it'll all work out in the end! You know how whenever you buy a mutual fund there is a disclaimer that past performance is not an indicator of future value? There's a reason for that warning. Things change. Sometimes they change dramatically. The Egyptian stock market has been closed for two weeks. When it eventually reopens, who knows what the values will be?

Now let's look at the momentum trades I closed this week:

Mon nothing
Tue nothing
Wed nothing
Thu closed one trade for +15% (WLL) and another for +7% (OVTI)
Fri closed a trade for +64% (COO)

Meanwhile the market value of my portfolio has gone up each day. It went up when the Dow was down, it went up when the Dow was flat, and it went up when the Dow was up.

So why doesn't everyone do this? This is actually the easiest question to answer. It takes work. It isn't throw money in an account, wake up 40 years from now and hope for the best. You must be involved in your investing decisions on a daily (or at least weekly) basis.

The choice is up to you. Go with the herd or take your destiny into your own hands. Frankly, if you aren't willing to keep up with your money, I think you're much better off putting your money where you are willing to focus, whether it be Chinese coins (as I know badon will suggest Wink ), your own business, or even just saving it.
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Neal McSpadden
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badon
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« Reply #1 on: 2011 Mar 04, 11:04:07 pm »

The buy and hold proponent will of course respond with statistics like the market (represented by the Dow Jones Index) has averaged 11% since 1920 or some similar number. To which I say, yes, it has, but that is too narrow a time frame to consider.

...

The Egyptian stock market has been closed for two weeks. When it eventually reopens, who knows what the values will be?

Nothing has been the same since Charlton Heston raided the grain stores and started giving it all away to the Hebrews. Rameses tried to tell everybody is was a bad idea, but did they listen? Noooo.

Now we gots Oblama and Ramsey duking it out. Speaking of that, we could use The Duke to fix some wagons 'round these parts.
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GhostRider808
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« Reply #2 on: 2011 Mar 05, 07:31:33 am »

tamo42,

Your breaking my back man.  Why do you insist on telling people the tooth fairy isn't real?  lol 
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dobedo
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« Reply #3 on: 2011 Mar 05, 10:52:24 am »

So buy and hold is for suckers?
So I buy and hold badon's coins.
So I buy and hold your advices.
So buy and hold is for suckers like me!
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badon
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« Reply #4 on: 2011 Mar 05, 11:00:40 am »

I think it depends on the trend, and how long "long term" is. In tamo42's strategy, he's working against the trend over very short terms. It takes a lot of work to do that. I'm a "long term" investor, which means I hold until I sell Smiley That could be years, it could be months, it could be days. Either way, as long as the trend is in my favor, I buy and hold.

Recognizing a change in the long term trend requires a lot of work too, just like it does in the short term.

I think the general gist of what tamo42 is saying is that unthinkingly sticking to an axiom like "buy and hold" is going to be a problem, and that "long term" means different things in different circumstances.
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If families are a problem for the system, then we must reject the system, not the families.
Founder of the Coin Compendium (forum, blogs, calendar, images, donate, contribute).
LBC makes you rich, with a free ebay gift certificate awarded every month!
The Coin Compendium and the china-mint.info forum, censure, disclosure.
Do not PM questions. Answers should be publicly available.
Backup is not enough. Protect your data with MultiPar.
Writer of LBC Chinese coin investment articles (list).
About me: User:Badon - MediaWiki.org
Badon effect: type 1 to 8, type 9.
I type faster on a TypeMatrix.
Use my work. Give credit.
Coin, medal, whatever!
Coin storage advice.
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tamo42
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« Reply #5 on: 2011 Mar 05, 11:16:20 am »

I think the general gist of what tamo42 is saying is that unthinkingly sticking to an axiom like "buy and hold" is going to be a problem, and that "long term" means different things in different circumstances.

dobedo, it's really the unthinking part that I am talking about. The idea that you can put money in an account, never worry about it, and wake up wealthy has a high degree of risk to it. Prices are set by supply and demand. The buy and hold mentality essentially assumes that demand will always increase over time. This has been true for the past century in America because of our growing population, productivity, and inflation. But will this continue to be true?

If you read badon's fundamental logic about the Chinese coin market, it basically posits that Chinese coins are extremely undervalued, but are becoming correctly valued by the Chinese as they become aware of them and aware of the problems in their own money supply. I happen to agree with badon's analysis and that it is a trend that will last a long time, but notice he's not talking about buying any coin from any where at any time. He's constantly reading, searching, and discussing things with others in the field. Just like I do in the stock market.

I focus on the stock market because that is where a very large portion of people's wealth is "invested." (It's not really investment, but that's another issue.) I guess the bottom line is that no matter what you do, actually pay attention to your money.
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Neal McSpadden
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