Investment Myths Busted

[winston]

Five Wall Street Whoppers And Why You Need To Know Them By Keith Fitz-Gerald

1) Buy & Hold
2) Some Debt is Good
3) It Pays to Diversify
4) Your Home is an Investment
5) Shop till you drop & Save the Economy

http://www.moneymorning.com/2009/03/19/ ... -whoppers/

[winston]

If you have bought in November and hold for 5 months, you would be sitting pretty.. but that's not really "buy & hold"

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More Buy-And-Hold Myths Debunked by Gary Halbert

IN THIS ISSUE:

Another Flawed Buy-And-Hold Theory
A More Realistic Analysis
Putting The NAAIM Study In Perspective
The Elusive Bear Bottom
The Recovery Fallacy

http://www.investorsinsight.com/blogs/f ... unked.aspx

[winston]

Diversification Works... Until It Doesn't

Diversification is a cornerstone of Modern Portfolio Theory and portfolio risk management. We spread our investments across a range of asset classes to ensure participation in the upside and reduce exposure to the downside. This is a time-honored strategy that works ... most of the time. But during epic market downturns, equity asset classes tend to march to the same dismal drumbeat.

How do we protect against these infrequent but destructive events? First we need to understand that they do happen — a reality this website has endeavored to illustrate over the past 18 months. Followers of buy-and-hold investing need to balance risky assets with an appropriate, age-adjusted ratio of fixed-income assets in their portfolios. This will help to minimize the chance that a market implosion near or in retirement isn't a life-changer.

Another approach is to employ a tactical asset allocation strategy that attempts to reduce equity holdings when the market appears significantly overvalued or when it is trending down. Both of these conditions, market valuation and moving averages, are periodically addressed at this website.

http://dshort.com/articles/2009/diversi ... rview.html

[kennynah]

wearing red underwear will direct the movement of your counter....

[winston]

How to Become a Market Timing Expert by Alexander Green

In this issue:
How to embrace uncertainty in the financial markets.
Does market timing actually work?
Two signals to time the market with.

At the Investment U Conference in St. Petersburg, FL two weeks ago, my good friend and colleague Mark Skousen called me out.

He told the audience that I was opposed to market timing, but laughed and insisted I was one of the best market timers he knew.

"He railed against the housing bubble four years ago - and he was right!" Skousen declared. "He called oil at $140 a barrel a joke - and he was right again! He has been insisting for weeks that the market was oversold and now it puts on the biggest two-week rally since 1938! Yet he stands up here and tells us no one can time the market. I don't understand it."

Perhaps a few members are wondering about this seeming contradiction, too. Let me see if I can clarify things a bit.

Why Market Timing Doesn't Work

First off - and for the record - no one can accurately and consistently forecast the stock market, the bond market, commodities, interest rates, or currencies. You can waste years of your life searching for some system, guru, broker, or money manager who can do this for you.

Let me save you a lot of trouble. It can't be done.

Jason Zweig summed it up nicely in The Wall Street Journal a few months ago, "Uncertainty is all investors ever have gotten, or ever will get, from the moment barley and sesame began trading in ancient Mesopotamia to the last trade that will ever take place on Planet Earth. If tomorrow were ever knowable with absolute certainty, who would take the other side of the trade today? The only true certainty is surprise."

Under ordinary circumstances, most stocks, bonds, currencies, precious metals and real estate are neither a table-pounding buy nor an urgent sell. The markets are not completely efficient but they are relatively efficient. Assets can trade for years - and sometimes decades - without being hugely undervalued or overvalued.

But from time to time things get completely out of whack. Then you can throw your market neutrality aside and jump in - or out - with both feet. How do you know when that is? Simple: When both valuations and sentiment go to extremes.

In late 1999 and early 2000, for example, the valuations on Internet stocks entered La-La Land. Most of these companies had no earnings - many didn't even have sales - and yet investors continued to bid them higher with talk of "The Technology Revolution," "A New Era" and other nonsense.

Valuations were completely ridiculous. Optimism was off the charts. In the January 2000 issue of the Communiqué, we called Internet stocks "the greatest bubble of our lifetimes and perhaps of all time." We further warned that investors in the hot net stocks risked getting "wiped out."

Sadly, many did.

When residential real estate became red hot a few years ago, I noted that home prices were rising far beyond inflation, population growth, building costs, discretionary income, or potential rental income. Yet thousands plowed ahead anyway, reminding us skeptics that "they're not making any more land" and "real estate always goes up."

When I noted that residential real estate in Japan had fallen every year for the past 15 years, a reader fired off a note saying, "Hey, Alex, take a look around. This ain't Japan!"

I hope he's right.

When I wrote a series of columns last summer calling oil "the mother of all bubbles," I noted that high energy prices always sow the seeds of their own destruction. I cited International Energy Agency data showing that production was rising and demand was falling. Yet speculators continued to bid oil sharply higher anyway. Sentiment was wildly bullish. There was talk among analysts of $500 oil.

Six months later the price of oil was $100 a barrel lower. And so it goes...

The lesson here? During periods of extreme sentiment and outlandish valuations - whether high or low - set aside your market-neutral philosophy and take a contrarian stand. That's why we reiterated our bullish stance on global equity markets in recent months.

Embracing Uncertainty

But let's not get carried away. We didn't foresee last year's severe credit crunch, or the magnitude of the recent stock market decline. We didn't know the market would begin a historic rally a month ago. And we don't know how long it will last.

No one else knows either. And that's fine.

Accept the uncertainty that's inherent in financial markets. Embrace it. Work with it.

You can't be sure which assets will perform best, so divide your portfolio among stocks, bonds, REITs, gold shares and inflation-adjusted Treasuries. (See our Asset Allocation Model and our Gone Fishin' Portfolio.)

But if you want to become a true market-timing "expert," pay close attention, the secret is simple:

You can't be sure how high or low your stocks will go - or when they will peak. So run trailing stops behind them to make sure you cut your losses and let your profits run.

Use this essential discipline - and stick to it - and over time your success is virtually assured.

You don't have to forecast the economy. Or time the market. Or predict interest rates or currencies. Just take care to avoid the fads, manias and bubbles that arise from time to time.

How do you do that? When you see those two glaring factors - wild extremes in both valuations and sentiment - feel free to "time the market."

[millionairemind]

May 15, 2009, 5:12 p.m. EST
Bonds break long-held investing rules
After a 'lost decade,' popular belief in stocks' superiority is under fire
By John Spence, MarketWatch

BOSTON (MarketWatch) -- Two brutal bear-markets for stocks within a decade and a stunning bull run for government bonds is challenging the gospel that stocks will always beat bonds if investors just hold on long enough.
http://www.marketwatch.com/story/stocks ... n-to-bonds

[winston]

Buy-and-Hold Your Way Broke By: Julie Crawshaw

Investor Insight head John Mauldin says "buy and hold" investing was "basically foisted on investors by an industry that wanted to keep assets under management."

"So, if you're a long-only manager and that's your hammer, then all the world looks like a nail" Mauldin tells The Financial Times.

"If you're a fund manager, you're not going to stand up and say: 'You know, I don't think it's a good time to invest in my fund. I think we'll just shut it down.' You'd be fired!"

In fact, investors should disabuse themselves that buying equities at all is investing, Mauldin says.

“It’s a different form of gambling. And you’re gambling on rising productivity, you’re gambling on rising price-to-earnings ratios, you’re gambling on all sorts of things.”

Mauldin says there will be some excellent commercial real estate investing opportunities in the U.S. and probably in the U.K. and parts of Europe, in a few years “as the commercial real estate debacle just craters.”

“You’re going to be able to pick up very, very good properties that cash-flow from day one,” he prophesies.

Buy-and-hold stock investing works fine if you have a long enough time horizon, says David Blain, chief investment officer of D.L. Blain & Co.

But in a secular bear market — which many forecasters believe is what we've got now — a buy-and-hold approach can be disastrous.

"Letting someone's portfolio decline 50 percent isn't prudent management," Blain notes.


© 2009 Newsmax

http://moneynews.newsmax.com/streettalk ... 20611.html

[kennynah]

there's a time to trade, scalp, invest....


this is a time to buy and hold....

[winston]

Post Earnings Announcement Drift (PEAD) by Matt Weinschenk, The White Cap Report

PEAD: An Anomaly With Regularity

After a stock announces an earnings surprise, it has a strong and documented tendency to outperform the market over the next few quarters. Thus, it warrants our undivided investment attention.

And for the record, this effect isn't in question. Respected researchers like S.P. Kothari of M.I.T. concluded that, "The PEAD anomaly poses a serious challenge to the efficient markets hypothesis. It has survived a battery of tests and many other attempts to explain it away."

Most questions now revolve around why it happens and not if.

Since there are an infinite number of ways to quantify the effect of PEAD, there's no single number to explain exactly how much outperformance to expect. One summarization, by Jack Hough of The Wall Street Journal, claims, "The top 20% in terms of upside surprises beat the broad market by three percentage points over the next six months."

That might not seem like a lot, but it adds up.

You can keep track of earnings surprises easily by navigating on the web to http://biz.yahoo.com/r/ (just click on "Surprises").

And if we get more stringent with our stock search, filtering for additional properties like revenue surprises, low institutional ownership, analyst experience and arbitrage risk, then it stands to reason that we'll witness an even higher PEAD and improved results.

[millionairemind]

For those who believe investing for the LONG term... is 10yrs a long enough time to judge how its working out??? How many 10yrs do you have in a life time to compound your money???

The Annualized Total Return Roller Coaster
August 5, 2009 latest update
http://www.dshort.com/articles/2009/SP- ... aster.html

Imagine that ten years ago you invested $10,000 in the S&P 500. How much would it be worth today, adjusted for inflation with dividends reinvested? Brace yourself: Your investment has shrunk to about $6,417, an annualized return of -4.34%. That's a 35.8% loss.

And this is an improvement over the same ten-year return as of March, when your annualized return would have been -5.93%, for a total loss of 45.7%.

Now let's imagine that we time-travel back to September 2000 and pose the same question. Your ten-year inflation-adjusted gain would have been 396% for an annualized return of 16.13%. As the chart illustrates, investment performance with a 10-year timeline has been a real roller coaster as far back as we have data.

If we extend our investment horizon to 20 years, the roller coaster is less volatile with higher lows and lower highs. The volatility decreases further with a 30-year timeline. But even for that three-decade investment, the annualized returns since the 1901 have ranged from less than 2% to over 11%.

As these charts illustrate, and as many households have discovered over the past 18 months, investing in equities carries risk. Households approaching retirement should understand this risk and make rational decisions about fixed income alternatives for that part of the nest egg that will pay non-discretionary expenses not covered by Social Security and pensions.

Click to see chart
http://www.dshort.com/charts/SP-returns ... -dividends