Sunday, May 27, 2012

"Stopwatch Investing - Betting Against The Wall Street Consensus" by Fred Carach

I have spent more than four decades betting against the Wall Street consensus. I wrote a book about it. As I look back over the decades, the most remarkable aspect of the Wall Street consensus is that it has been getting dumber and dumber. You have got to admit that this is a truly heroic achievement.

In my book and in a series of articles that I have written I have pounded away at this enigma. Let us take a look at stopwatch investing one of Wall Street’s reining stupidities. There are so many of them that it is hard to know where to begin.

When I broke into the market in the 60s, people were married to their stocks. They were junior Warren Buffets. Buffet has famously stated on many occasions that his favorite holding period was forever.

A typical holding period back then was until retirement. After you retired, you would shift to bonds. Only crazed speculators would contemplate buying a stock that they were not willing to hold for at least five or ten years. The thinking back then was that the only sound reason to buy a stock was that you understood and believed in the stock and you wanted to be an owner of a company that had a bright future and produced what you believed was a great product or service. After all, if you did not believe this why would you want to own the stock? In other words, you were a conviction investor. You were not conditioned to bolt from your stock at the first sign of trouble. As a matter of fact, it is quite possible that your stock could fall by 15% or 20% with out you even being aware of it. Back then, there was no CNBC and most newspapers did not carry the stock tables. People thought nothing of going months at a time without knowing the current sale price of the stock. After all, they knew why they owned the stock.

It was common then for stockowners to always be bragging about the stocks that they owned and they would promote them at every opportunity. If you owned Pepsi, you would only buy Pepsi. You would never, ever buy Coca-Cola. If you owned GM, you would only buy GM cars.

Contrast this behavior with that of a typical stockowner today. He has been taught by the gurus on CNBC and elsewhere that he who is wise is ready to bolt from his holdings at the first sign of trouble and that a 5% or 10% drop in a stock is the end of the world. After all, how many 10% drops can you survive?

What this leads to of course is stopwatch investing. If you have been in this racket for any length of time I am sure you will agree with me that it is truly amazing how often even blue chip, high quality stocks drop 10% and even 15% for no rational reason at all. Forget about 5%.

Today’s investors have for the most part been indoctrinated into believing that he who is smart always puts in a stop-loss order at 5%-10% below his purchase price. This results in vast masses of stop-loss orders that are just under today’s prices and appear to be triggered every time you turn around.

If the stock has not moved in 30-60 days you are ready to bail out at the first sign of trouble.You have been taught to think small and to be ready to bolt at the first sign of trouble to protect your pathetic 5% or 10% profit. It is rarely more than that. This is no way to get rich.

There remains a question that has not yet been answered. The question was how many 10% drops can you survive?
I know the correct answer to this question. The correct answer is thousands of times and I am living proof that this is the correct answer.

Provided of course that you make the smart money move and refuse to turn a loss that exists only on paper into a real loss by selling the stock. If you research your stocks and if your judgment is worth a damn you can expect to be right at least 60% of the time. Hell, chimpanzees that throw darts at stock tables are routinely right more than 50% of the time.

The fatal curse that kills stock investors is not so much that they pick bad stocks but that they keep second-guessing their stock picks. This will absolutely kill you. You will go from being right 60% of the time to being wrong most of the time.

No doubt you are wondering how I bet against the Wall Street consensus. I hope you are sitting down. Brace yourself. One of the biggest money making strategies out there is to selectively add to your position after your stock has fallen 10%-20%.

The holding period that will maximize your profits is not 15 minutes or 60 days or god forbid 90 days but 2 to 5 years. Follow the strategies that I have outlined and your losses will turn to profits like magic.


Forty Years a Speculator
Fred Carach
Oakland Park, FL 33309
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http://www.amazon.com/Forty-Years-Speculator-Fred-Carach/dp/1430316608

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