Investment Myths Busted

[LenaHuat]

Lorna and Fiona of the ST are superficial and lightweight writers. The BT reporters hve much more gravitas.

[kennynah]

guess, i didnt miss out much then, for having stopped the daily ST subscription to be delivered to my doorstep... afterall, anything of importance, i'd hear of it eventually.

[winston]

From Millionairemind with thanks:-

Market timing converts
Commentary: Market Timing Popularity Indicator says bottom not yet at hand
By Mark Hulbert, MarketWatch

ANNANDALE, Va. (MarketWatch) -- Earlier this week, in reporting that contrarians did not believe the market had bottomed, I suggested that "When genuine capitulation finally takes place, few will recognize it as such at the time."

I also wrote that "an eagerness to declare that capitulation has occurred probably means that it hasn't." Read my Oct. 7 column.

In today's column, I want to focus on a related way of assessing whether a major bear market is nearing its final low: A gauge I first introduced more than 15 years ago that I call the "Market Timing Popularity Indicator."

This indicator measures where the average adviser lies between the extremes of buy-and-hold and market timing. Historically, buy-and-hold tends to reach its peak of popularity at market tops, just as market timing becomes most out of favor. The inverse tends to be the case at market bottoms.

For example, that means that, as a bear market approaches its final low, at least a few die-hard believers in long-term buy-and-hold throw in the towel and become latter-day converts to market timing.

That has yet to happen, however, at least as judged by my reading of the 200 newsletters monitored by the Hulbert Financial Digest.

Consider some of the comments made over the last couple of days by the buy-and-hold oriented newsletters on the HFD's monitored list:

"At the risk of sounding like a broken record, I urge you to stick with my earlier advice, and stick with your long-term investment plan. Running to cash may sound like a good idea on days like today, but you'll almost certainly miss out on the gains when the market starts behaving more rationally."

"It's important to know that markets have lost this much before and that things will get better. It's just a matter of time... We know that it is critically important to be invested when the market turns around... It's important to remember that the U.S. economy remains the biggest, most resilient and adaptable in the world. Better days and better markets lie ahead."

"It is not easy to keep our eyes on the three-to-five year time horizon, but history has shown that these are the times when those with iron stomachs have been greatly rewarded... My overall faith in the long-term prospects for equities and the long-term health of the U.S. economy remains strong."

"You need to have a plan [and you] also have to be realistic about your goals. On days like we've seen recently, with the market declining 700 points at a time, you have to know that there will be setbacks, but that you're working towards the pot of gold that will be there once the storm clouds clear."

I could go on and on, but you get the idea.

Let me stress that I don't necessarily disagree with the arguments these newsletters are making. I also want to emphasize that many of them have stellar long-term records.

Regardless of whether you or I agree with these buy-and-holders' arguments, however, is irrelevant. My point is instead that, at least historically, some die-hard adherents to buy-and-hold eventually give up the faith -- when things get bad enough. And when this conversion does take place, a bottom is probably not that far away.

Take the end of the last bear market, some five years ago. Just a few days prior to the ensuing bull market taking off, one of the newsletter arena's staunchest supporters of buying and holding declared that he had changed his mind and that he now believed it was essential to be a market timer. My column reporting this change of heart appeared on March 11, 2003, the exact day of the successful retest of the market's bear market low. Read March 11, 2003, column.

To be clear, the timing of that column five years ago was lucky; I would never claim pinpoint accuracy for this market timing model -- or any other, for that matter.

Still, it is worrisome that, unlike what has happened at bear market bottoms in the past, we have yet to see adherents of buying and holding becoming converts to market timing.

[winston]

Better Than Buy-And-Hold
Chuck LeBeau, SmartStops.net 10.14.08, 6:05 PM ET

In less than a year, six widely held financial stocks (Fannie Mae (nyse: FNM - news - people ), Freddie Mac (nyse: FRE - news - people ), Lehman Brothers (nyse: LEH - news - people ), American International Group (nyse: AIG - news - people ), Washington Mutual (nyse: WM - news - people ) and Bear Stearns) have cost buy-and-hold investors more than $840 billion. That's more than the controversial government bailout that has the entire country up in arms. If we add in the losses in the rest of the market, we're talking about recent losses measured in trillions of dollars

Think of all the retirement funds and college tuition money that has been needlessly lost in these few months. It's a very sad scenario for average investors who are not Wall Street tycoons. However the saddest part is that the investors who lost all these billions and trillions of dollars could have avoided this disaster by simply using some logical exit strategy to protect their investments.

Buy-and-hold is not only the riskiest possible strategy, it doesn't even qualify to be called a strategy. Buy-and-hold is actually the absence of any intelligent exit strategy and is mostly adopted by default. Buy-and-hold is only recommended by unknowing pundits who are out of touch with the modern marketplace and are willing to advise their followers that taking unlimited risk and being in the market 100% of the time is a good idea. Obviously, that mistaken advice has proved to be very costly.

Investors should be concerned that there may be even more disaster stocks in the months ahead. The investing climate has changed forever and buy-and-hold should no longer be the exit of choice for mainstream investors. In the last few years, many well-known stocks that were once considered "blue chips" have declined 90% or more. Volatility in the market is at an all-time high and expanding.

Prudent investors must learn to protect their investments. The days of being patient and comfortable with buy-and-hold are long gone. The risks of buy-and-hold are now much too high and the returns over the last 10 years have been less than zero. Buy-and-hold investors have been exposing their capital to unlimited risk for meager or negative returns.

One obvious exit strategy that can prevent catastrophic losses is the use of a trailing exit commonly known as a "stop loss order." In the past, most investors have been reluctant to use trailing exits because they are afraid the stock might recover and go back up after they have exited.

The solution to that problem is to have a plan to reinstate the position when the liquidated stock shows signs of recovery. Selling a stock doesn't mean you have given up on its prospects for the future. Selling is just a temporary measure necessary in today's markets to protect your capital from the increasing probability of catastrophic loss.

If the stock you sold declines, you may very well want to buy it back and you will now have the capital to buy more shares than if you had held your original position. One blessing in these highly volatile markets is that transaction costs are so low that they are virtually inconsequential and measured in fractions of a cent per share. An extra $10 or $20 in transaction costs is a small price to pay to protect hundreds of thousands of dollars from permanent loss.

Here are three suggestions on how to implement an effective trailing exit strategy:

--Identify the direction of the current trend. If the trend is up you will want to set the trailing exit a safe distance away from prices so that you do not exit while the stock is trending up. You want to let profits run. If the trend is down, set the exit closer to prices to cut losses and preserve capital.

--Keep an eye on volatility and adjust the exits farther away if volatility increases and then move them closer if volatility decreases. The exits need to be kept outside of normal up-and-down price action that changes with volatility. Volatility is presently at record levels so give the upward trending stocks plenty of room.

--Before you exit, make sure you have a plan to re-enter the stock if the uptrend resumes. The trailing exit provides a very valuable yet inexpensive form of loss insurance. The price of that insurance is that your exit may occasionally get you out at a point where the stock stops going down and turns up. Rather than miss the uptrend and blame the protective exit for the lost opportunity, simply buy the shares back. Worst case, you will have paid a small price for protection from a possibly catastrophic loss. Your exit did its job.

This simple advice would have saved investors trillions of dollars over the last 12 months, and I'm confident that it will save investors trillions of dollars in the future.

Buy-and-hold is dead. Most investors are not going to miss it--may it rest in peace.

Chuck LeBeau is director of analytics at SmartStops.net. He is also co-author of "Computer Analysis of the Futures Markets" (McGraw-Hill).

[sidney]

I read the article in the Sunday Times.

Suffice to say - It is misleading and an over-simplification. Investing is not so straightforward buy-and-hold. It requires a lot of reading, research and understanding, even when it comes to unit trusts (not just pure equities).

I dun like unit trust. Have no control.......

[sidney]

Buy-and-hold is dead. Most investors are not going to miss it--may it rest in peace.


Buy and hold will work as long as company can grow and generate income according to your expectations right? No point buy a sunset industry at a cheap price and see it going cheaper (in contrast to recovered equities) even when mkt recovers...

[winston]

What If You're Wrong? by Alexander Green

Look at every investment disaster individual investors have endured throughout history and the cause is virtually always the same. They neglected to ask a simple question: What if I'm wrong?

Take the guy whose retirement account is loaded up with shares of one company, the same one he works for. He exposes himself to a career downturn and an investment disaster at the same time. He forgets to ask, "What if I'm wrong?"

Or the woman who buys an investment property in a hot market, taking out a mortgage she can barely afford. What if she's wrong?

Take the trader who loads up on call options, trades heavily on margin or bets the farm on the bull market in oil continuing. What if he's wrong?

Of course, every investor can be wrong. We all are occasionally. Successful investing is about taking - and intelligently managing - risk.

We are well aware that to a large extent the future is unknowable. So despite our well laid plans, we always hedge our bets.

That means buying quality, diversifying broadly and running trailing stops behind each of our individual stock positions. Anyone who has done that over the past 12 months is miles ahead of the average investor.

As the old saying goes, "The winner in a bull market is he who makes the most. The winner in a bear market is he who loses the least."

Although we're in a bear market now, the time has already come to start looking ahead. Investment legends like Warren Buffett and Mark Mobius know this. (They have the benefit of a well-informed investment perspective.) Your average talking head, apparently, does not.

For instance, there have been six major bear markets over the past 80 years. The average decline in the Dow Jones Industrial Average of the previous five disasters - from peak to trough -was 43%.

That's just about the low point of the current bear market. Unless we're about to enter a "Greater Depression," we're a lot closer to the bottom than the top.

And there are opportunities galore, although most investors are too scared to move on much of anything.

Many of them are tucked safely away in T-bills, where they can sleep soundly at night. But is the purpose of your investment portfolio to provide for you and your family in retirement or is it to play Brahms' Lullaby?

Many of these investors have deluded themselves that they will wait until the coast is clear and then safely re-enter the market down the road.

In other words, having failed to see the top of the market - like 99.9% of all investors - they are now confident they can pick the bottom.

What if they're wrong? What if the market is already discounting a severe recession? They run the risk of sitting in cash, collecting a pittance, when the market starts to rally again in earnest.

Meanwhile, there are plenty of companies out there trading at bargain basement levels. If you don't have much faith in near-term earnings, try a different tack. Buy a few companies that are loaded with cash.

Which ones? Well, for starters, there is AutoDesk, Amdocs, Dell, Expedia, Foster Wheeler, NCR, Cisco Systems, BMC Software, McDermott International, Hewlett-Packard, Intel and Nike.

What if I'm wrong? What if these cash-rich companies go down in the near future, too?

That's always a possibility. But if you use our recommended 25% trailing stop, you're not just buying cheap... you're strictly limiting your downside risk.

The investor holed up in cash, on the other hand, is earning a meager 2% or so on his money. He may not reach his investment goals. But he sleeps well... and he feels safe.

What if he's wrong?

[winston]

On The Economy And Active Management by Gary Halbert

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

[kennynah]

it's a myth that Long stock is a limited risk trade... just by itself, it is true that the maximum losses is when that stock goes to $0.... which has happened..so dont rule out the chance, however remote it is...

[winston]

"Buy-And-Hold" Bites The Dust - Now What? by Gary Halbert

1. Economic Overview
2. The Conventional Wisdom Was Wrong
3. The Shortcomings Of Index Investing
4. Are Low Fees The Key To Investment Success?
5. Risk Management Is Crucial

Long article so here's the link:-
http://www.investorsinsight.com/blogs/f ... -what.aspx