Don’t Get Caught by Catch Phrases
By Eric Gemelli
The problem with the trite phrases brokers spew forth is that they are often inappropriate, misleading or wrong. Here are a few of my favorites:
Buy on dips: if you’ve been Buying on Dips for the last 10 years, you’ve been losing money. Sell After A Rally has been much better advice. But that’s okay, “they” tell you, because The Market Will Be Back. Long-term that’s true, but empires and their values don’t stay strong forever – just ask the Persians, Romans or Japanese.
To find out how effective Buy and Hold is just ask your grandfather how his Studebaker stock is performing.
Just as bad is the idea that you need to Be A Long-Term Investor in the stock market. This cliché worked well for a brief 20-year period (only 10% of the market’s history), but stopped being useful 10 years ago, which is why you always see the disclaimer that Past Performance Doesn’t Mean Squat. This is actually true, which is exactly why the SEC requires it to be pasted all over prospectuses. Sometimes record highs lead to record lows. The universal principle that “the proud shall fall” is true both personally and nationally. Look at a chart of Japan’s Nikkei stock market as an example of both.
In my July 2001 column, I noted the Nikkei had been falling for roughly 10 years and correctly predicted it “probably won’t hit bottom for another 10 years.” After 20 years, the Japanese stock market has fallen 75% and Reuters recently reported Japan “suffered the biggest fall in factory output in more than a year,” down 1.5%.
Eventually the Dow will go through a similar cycle so, depending on when you give up on your losing shares, “buy and hold” could mean “ride the plummet all the way down.” That’s why brokers also tell you to diversify because buying 20 stocks that are losing money or bonds and real-estate that are all tanking is somehow better than having five stocks that have share prices that are collapsing.
When picking stocks or mutual funds investors are cautioned “don’t chase last year’s winners.” I tend to agree with this notion. Disciplined rules-based managers outperform lucky money-managers over the long run in spite of whatever Wall Street says is hot right now.
But The Street says… (What street? Sesame Street?) “Invest in the New Economy or Invest in the Green Economy.” Economic principles are the same as always: if the company doesn’t make a profit (can you say “Blockbuster”?), the share price is going to get hammered. The economic principles of supply and demand projected the devaluation of AT&T long ago.
Both AT&T and Blockbuster are in fields that have stiff competition and the services they provide are similar to or exceeded by their competitors. People naturally choose convenience and value so businesses lower prices to compete, reducing profits, and therefore share price.
Who is “the Street” anyway? Are these the same people who told us to invest in dot coms and are now telling us to Fly to Quality? What was so wrong with quality that we had to leave in the first place?
One cliché that actually makes sense is: Pigs Get Fat and Hogs Get Slaughtered. When you have a nice profit, take it. That way you will have Bought Low and Sold High.
If you apply all of the brokers’ advice at once you’d have Flying-Quality-Pigs-Chasing-Winners-Down-the-Street-while-Dipping-and-Holding-the-New-Green-Economy-because-of-Past-Performance.
Author Eric Gemelli founded Cornerstone Financial Services LLC in 1997 and as the managing member has worked in mortgage banking, life and health insurance, raised venture capital, and traded commodities, averaging 30% a month doing so. He offers market forecasting services and has more information available at CornerstoneFinancialServicesllc.com
