When I broke into the stock market more than forty years ago in 1961 it was a radically different beast than it is today. It was a market overwhelmingly dominated by long-term, conviction investors who believed that they were buying or owned a real business rather than a stock certificate. The belief then was that the stock certificate was nothing more than proof of ownership. It was not a lottery ticket. Investors then were committed owners who religiously bought the goods and services of the companies that they owned. What was important was that the stock that they purchased paid a good dividend and in those days, it usually did. It was then common for blue chip stocks to pay a dividend of five or six percent.
It would never have dawned on investors then that they were supposed to rush to sell their holdings even if their stocks fell as much as ten or fifteen percent. In fact it was quit probable that they would not even be aware of a ten or fifteen percent move. The way it worked in those days is that about every six months it dawned on you that you should look in the paper to see what your stocks were selling for. Then you would throw away the newspaper and not look at your holdings for another six months. It was common to think of holding periods of five or ten years and in many cases people expected to retire owning the stock. The dividend was going to be an important supplement to their social security.
This of course assumes that your newspaper even carried the stock tables. In those days, many newspapers did not. When I was growing up the Cortland Standard, our local newspaper did not carry the stock tables. In fact it did not even have a financial section.
When I started investing in the 60s, I refused to look at my stocks during the week. I didn't want to get caught up in the weekly cattle stampedes. I always knew that stampeding with the herd was not the answer to successful investing. I subscribed to Barron's Financial Weekly, which arrived every Saturday. I could then leisurely review my holdings over the weekend. This strategy served me well for decades. However, eventually I had to go on line like everyone else. The decades of discipline served me well. My investment strategy of long-term conviction investing remained unchanged.
Today the stock market as I knew it is dead. The long-term conviction investors who understood that they were buying a business and not a lottery ticket is now a shrinking minority group. The stock market today is dominated by the trend chasers, a category that barely existed in the 60s. it makes little difference if you call this dominate group day traders or momentum players. They are united by their steely conviction that what they are buying is a lottery ticket. Regrettably, they are too stupid to realize that if you treat the stock market like a casino then the stock market will treat you like a gambler.
The world of the trend chasers is to a great extent dominated by technicians or chartists. About the fundamentals of the corporations that they are following they know nothing. Indeed they regard their ignorance as a badge of honor. They are totally clueless that their might be a real business behind the lottery tickets that they own. They are interested in only two things as they track their stocks across their charts, price and volume. They will be happy to inform you that the only reason to buy a stock is that it is rising in price and if it is not rising in price it is a bad investment no matter how great the fundamentals are.
Their other great fixation is their unalterable conviction that paper losses and real losses are the same thing. They have total scorn for anyone who does not share this belief. A paper loss is a loss that would be realized if the holding was sold at its current price. Therefore, since a paper loss and a real loss is the same thing their secret weapon for investment success is the " stop-loss order." The stop-loss order is an order to your broker to automatically sell your stock if it falls to a predetermined price. Which is almost always set at between five and ten percent below the current price.
Trend chasers are adamant that all paper losses greater than five or ten percent must be sold immediately because all such stocks are destined to go to zero. Nothing can dissuade them from this insanity. The brutal result is that every time they turn around they are being blown out of their positions by their stop-loss orders being executed. Stock declines of five to ten percent are as common as dirt in the stock market. The trend chasers refuse to recognize this reality. The brutal result is that all their paper losses become real losses.
As a conviction investor I have made a career out of Turning paper losses into profits. The trend chasers make a career out of turning paper losses into real losses with devastating consequences. If you have a good opinion on stocks and just hold on most of the time the stocks will reverse their decline and your losses will turn into profits. Their insistence in believing that all stock declines greater than five or ten percent is proof that the stock is headed for zero is insanity.
Very few investors who practice this strategy survive over the long term in spite of its tremendous popularity. The way it usually works is that the trend chaser is blown out of his position at or near the bottom. They then sit around in a stunned stupor as the stocks that they sold at a loss reverse their trend and make back all that they have lost and more. Often much more.
What is truly astonishing is that no matter how often they have seen how this film ends. They never change their tactics. The losses keep piling up until they are so shattered by their losses that they end their investing career. They can then embark on a their new career of contemplating how much they wold have today if they only had the courage to hold on to their losers.
Those who have found this article of interest will also find my related articles on the stop-loss order and technical analysis which are on this site to also be of interest.
It would never have dawned on investors then that they were supposed to rush to sell their holdings even if their stocks fell as much as ten or fifteen percent. In fact it was quit probable that they would not even be aware of a ten or fifteen percent move. The way it worked in those days is that about every six months it dawned on you that you should look in the paper to see what your stocks were selling for. Then you would throw away the newspaper and not look at your holdings for another six months. It was common to think of holding periods of five or ten years and in many cases people expected to retire owning the stock. The dividend was going to be an important supplement to their social security.
This of course assumes that your newspaper even carried the stock tables. In those days, many newspapers did not. When I was growing up the Cortland Standard, our local newspaper did not carry the stock tables. In fact it did not even have a financial section.
When I started investing in the 60s, I refused to look at my stocks during the week. I didn't want to get caught up in the weekly cattle stampedes. I always knew that stampeding with the herd was not the answer to successful investing. I subscribed to Barron's Financial Weekly, which arrived every Saturday. I could then leisurely review my holdings over the weekend. This strategy served me well for decades. However, eventually I had to go on line like everyone else. The decades of discipline served me well. My investment strategy of long-term conviction investing remained unchanged.
Today the stock market as I knew it is dead. The long-term conviction investors who understood that they were buying a business and not a lottery ticket is now a shrinking minority group. The stock market today is dominated by the trend chasers, a category that barely existed in the 60s. it makes little difference if you call this dominate group day traders or momentum players. They are united by their steely conviction that what they are buying is a lottery ticket. Regrettably, they are too stupid to realize that if you treat the stock market like a casino then the stock market will treat you like a gambler.
The world of the trend chasers is to a great extent dominated by technicians or chartists. About the fundamentals of the corporations that they are following they know nothing. Indeed they regard their ignorance as a badge of honor. They are totally clueless that their might be a real business behind the lottery tickets that they own. They are interested in only two things as they track their stocks across their charts, price and volume. They will be happy to inform you that the only reason to buy a stock is that it is rising in price and if it is not rising in price it is a bad investment no matter how great the fundamentals are.
Their other great fixation is their unalterable conviction that paper losses and real losses are the same thing. They have total scorn for anyone who does not share this belief. A paper loss is a loss that would be realized if the holding was sold at its current price. Therefore, since a paper loss and a real loss is the same thing their secret weapon for investment success is the " stop-loss order." The stop-loss order is an order to your broker to automatically sell your stock if it falls to a predetermined price. Which is almost always set at between five and ten percent below the current price.
Trend chasers are adamant that all paper losses greater than five or ten percent must be sold immediately because all such stocks are destined to go to zero. Nothing can dissuade them from this insanity. The brutal result is that every time they turn around they are being blown out of their positions by their stop-loss orders being executed. Stock declines of five to ten percent are as common as dirt in the stock market. The trend chasers refuse to recognize this reality. The brutal result is that all their paper losses become real losses.
As a conviction investor I have made a career out of Turning paper losses into profits. The trend chasers make a career out of turning paper losses into real losses with devastating consequences. If you have a good opinion on stocks and just hold on most of the time the stocks will reverse their decline and your losses will turn into profits. Their insistence in believing that all stock declines greater than five or ten percent is proof that the stock is headed for zero is insanity.
Very few investors who practice this strategy survive over the long term in spite of its tremendous popularity. The way it usually works is that the trend chaser is blown out of his position at or near the bottom. They then sit around in a stunned stupor as the stocks that they sold at a loss reverse their trend and make back all that they have lost and more. Often much more.
What is truly astonishing is that no matter how often they have seen how this film ends. They never change their tactics. The losses keep piling up until they are so shattered by their losses that they end their investing career. They can then embark on a their new career of contemplating how much they wold have today if they only had the courage to hold on to their losers.
Those who have found this article of interest will also find my related articles on the stop-loss order and technical analysis which are on this site to also be of interest.
4 comments:
Fred,
Very interesting opinion. I also enjoyed your article in REALTOR Magazine this month about the Florida land boom of the 20's. I have the same investment philosophy with my real estate investments as you do with your stocks. I look at the cash flow of each building to determine value. I used to carry the same philosophy with stocks. I am an avid student of Warren Buffett. But I've learned one thing: price can often stray extremely far from value and stay that way for years. The other problem I have with value investing from the outside, is that it is very difficult to truly understand everything about the business you own. How many people thought they owned great companies (Wachovia, Bear Sterns, etc...) and didn't know what was going on behind the scenes. I think true value investing only works if you truly know what you own (ala Warren Buffett). If this is not the case, I prefer a modified value approach where you diversify your holdings and keep an eye on economic fundamentals to stay out of the market when it looks poised for a drop (like going from 14,000 to 6,500). I prefer to look for good fundamentals, and then combine them with general, long term trends because my number one concern in the stock market is preservation of principal. This fits my strategy because my focus is real estate investing and I feel I know that business better. However, if you come across a company that you know inside and out, and you've talked with management and you are 100% confident in the value of the business, then value investing makes sense. I just think the majority of "value investors" think they understand the businesses they own, but they actually do not. It's an interesting debate and I'd love to hear your thoughts.
John Huber
www.JohnHuberRealEstate.com
Your strategy doesn't quite work so well on OTCBB/Pink Sheet stocks as they don't have a bottom unlike Canadian listed stocks which can't sell below $0.005, price level which acts as a backstop and reduces the possible dilution rate a stock can suffer.
It recently happened to me that I found a nearly untold-of stock called Yukon Gold Corporation, which currently owns the Marg property in Yukon, Canada (20000 acres) and trades on the OTCBB. It seems to be sorta out of cash.
As of March 2010 it has around 40 million outstanding shares, with 150 million authorized.
After seeing it near the $0.01 range (previous all time lows), I buy $0.0121s, then it dips to $0.005 - I buy some more at $0.0051 and then...$0.002 print. In two days.
Really awesome entry don't you think?. Buy it low just to see it downspiral out of control. While it has now made a small bounce, I need a higher push to get out of this mess. And hope I get a breakeven trade, since once a stock dips so low it rarely jumps more than 500% from its base.
Excellent comments John.
I would argue that you don't need to know nearly as much as you think you do.
Certainty is a dangerous delusion. I never spend more than an hour or two analyzing a stock. The law of diminishing returns is an absolute law and it kicks in quickly. The only thing that certainty does is ruin you by giving you a false sense of confidence. Good judgement coupled with massive diversification is what works. No more than 5% in any position.
Post a Comment