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Archive for March, 2010
The end of Buy and Hold
If you believe that more cycles of feast and famine are ahead in the markets-as I do, then it becomes even more critical to be aware of the start and end of these cycles. The keys to this lie in analysis of a few key indicators or gates that can quickly help you assess if your favourite stock, ETF, MF or index is indicating a time to buy, sell or stand aside. If anything is certain based on what we’ve seen in the last 10 years, it’s that the idea of buying a stock and holding it for an extended period and expecting it to provide a good return, is dead. You will have to become more vigilant and even spend some time looking over your brokers’ shoulder as he or she directs your investment choices.
The bottom line is this: you have a goal for investing in the stock market, presumably any market. That reason is to make money. At the very basic level, you buy at some “price” and if you succeed at your goal, you sell at some higher “price”. End of story. Where things get murky is when people start to assign “value” to things. Value is invariably a comparison between two or more entities. My thesis says, you don’t care about “value”. You can buy stocks at a good value relative to other times when they were higher or at a good value relative to others in their category and still lose money. The only thing that matters in this case is what the PRICE is doing. This is akin to a tennis match. There is much going on at any given tennis match, the grunting of the opposing players, the temper tantrums, bipolar crowds, umpires and line judge calls. In the end, the game is decided by the movement of the ball across the net. It’s_all_that_matters! You want to make money buying and selling financial instruments? Keep your eye on the PRICE
Set aside your need to understand the whys of the markets for a minute. Tell yourself what ever you have to, to make this idea work: “The market is smarter than I am”, “it’s already priced in”, “markets are well ordered”. Whatever. It matters not. If you buy and it doesn’t go up, you lose. Plain and simple. Stay with me here. The key then becomes: how do you know when it’s time to buy and more importantly, time to sell. The simplicity of this boggles the mind, but you buy when the stock has crossed a series of gates in the upward direction and you sell when it’s crossed a series of other gates in the other direction. Here’s the meat of the matter: the gates.
In simplest terms, these gates are moving averages. Research has shown that attention paid to a particular set of the moving averages would have saved you from the recent 50+% decline in the stock market in the most recent meltdown. These very same gates would also have alerted you to the change in direction that occurred in March/April 2009 that a change in direction was underway. Understand this: These gates are not a set of tea leaves, or financial crystal ball. They won’t tell you when it’s about to happen, but they will alert you to the fact that it has. With these gates you won’t wring every drop of gain from a stock, index or fund, but you will live in the meat of the meal so to speak. Markets move relatively slowly. It’s only the daily bombardment of our senses with 24 hour news networks and stock market reports on the hour or on demand that make it seem s though things move faster than that. With the benefit of history, you can see that your decision to get in or out a day or so later is not a break or make event, MOST of the time. These moving averages are like molasses, too slow and unsexy for our fast-paced, always-on, instant society. But miss what they’re telling you and you’ll be at the mercy of tidal waves of bad fortune. Pay attention and you’ll be sleep better, wake up happier and be wealthier. So pay attention.
To your financial health
Making sound investment decisions in this environment
Confused about when to buy and sell your stock/ETF? A raised Financial Situational awareness will serve to free you from the ties that bind you to brokers and talking head financial wizards alike. After all, we know how many of them made the right call going into the last crisis. What if you had the tools to accomplish these assessments yourself? Your vested interest means YOU’RE less likely to be asleep at the wheel when it comes time to act. This current stock market period represents one of the more trying times from the standpoint of trying to pick winners and letting them ride. Patience becomes a huge virtue at this time, but it becomes even more important to be able to tell what’s a buying opportunity or just a flash in the pan. The temptation is great to try and “make up” for losses of the recent past. This makes the decisions you make even more critical than at other less emotionally racked investment periods. We’ve seen the folly of pure fundamental based investments-in a panic the baby_and_the bath water all gets tossed out. A clear indication of directional movement above (buying opportunity) or below (toss out with the aforementioned baby) key indications will serve you well and help make your buying decisions evidence based and not emotionally based. This knowledge is what I refer to as increased Financial Situational Awareness. My website speaks directly to these ideas and in ten minutes my ebook will give clear indications of what to do and when.
To your investing health.
Catch a Falling Knife – Why Averaging Down is a Bad Idea
The mere image conjures up frantic mothers screaming at their young charges. The act itself is something few of us have ever done, or would even in our wildest dreams try. And yet…..
This is exactly what many financial advisors implore you to do with your money.
Allow me to explain.Dollar cost averaging, buy on the dips, diversification is the key to portfolio preservation, buy and hold-you’ve heard these terms and perhaps you’ve even based some portion of your financial future on these. You’ve been the victim of one or more shrewd financial pitchmen. These concepts help do one thing very well, make and keep the advisors who pitch them very wealthy.
The financial expression “To catch a falling knife” is to attempt to buy a stock or investment that has fallen so far in value that it MUST be a bargain. If it was a great stock at $50, it’s a SCREAMING buy at $40 and worth mortgaging the house, wife and dog for at $30. WRONG! WRONG! WRONG!
Let’s keep it simple. If you’re like most, you make money when the stock you buy goes UP! End of story! Let’s set aside the consideration of dividends for now. My contention is that your job as a responsible captain of your own ship is to make a profit. I contend that the magic lies not in trying to PREDICT where a stock will go or WHEN. I contend that if you simply stick to what the stock is doing NOW, you’ll be much further ahead. What averaging DOWN does is reduce your average price-true-and we’re all taught that if you were willing to buy it at $10 and it’s now $5, you buy with both hands. Let me challenge you that perhaps it’s now on sale at $5 because fewer people want it.
The key takeaway here is that what you really need to know is how to tell when it’s time to buy and to sell. If you simplify it in this very clear and concise manner, it will help you cut through the maddening herd clamoring for your attention to feed at their trough under the guise of the next magic prediction method.
Think of this as an important tool in your investment arsenal.
Simple Financial Truths
It may seem obvious, but as a BUYER you want to invest in instruments that are going UP in value. The converse is true if you’re a seller. Seems simple enough.However something gets lost in the heat of the moment, when YOUR money is on the line causing the application of this simple truth to fail. Something that makes you lose sight of this simple truth. Unfortunately at some point it ceases to become a series of financial decisions and becomes perhaps a series of emotional ones. During this heated time you forget that the most important thing is to decide if the reason for investing in this instrument has changed. Has the investment stopped going in your direction? I contend that this is the most important question that you must ask-and keep asking-while your money is on the line. The answer while not immediately apparent is key to what you do next. Whatever criteria you use, you must have the answer to the questions-is THIS investment still increasing in value or is there some better place I could put my money where it will either have better appreciation, less erosion of value or more generation of income? While this may seem too simplistic a series of questions, when you see the huge losses sustained all around you in various(even yours) portfolios, it’s abundantly clear that someone isn’t asking these simple questions.
Questions asked. Now where do you find the answers? Having this information is no guarantee of action, but it’s the necessary next step in the process of making informed financial choices. Tomes have been written about financial analysis and various theories of buying, holding and selling. I propose that in the final analysis, the answers are very simple-what you want to know is: Am I making money, losing money or just keeping pace with inflation?
In Ten Minutes to Financial Freedom, I get to the heart of the matter by showing you how to make this key determination. Learning to interpret these simple criteria will allow you in minutes to make this assessment. Having this key tool in your investment arsenal will help your decision making and bolster your confidence in challenging any recommendations to buy or sell and financial instruments that don’t meet these most basic criteria.
To your increased financial situational awareness.