Tahoe Market Pulse: Traders: Think twice before getting rid of those stocks
In the classic book, Reminiscences of a Stock Operator, which is assumed to be the autobiography of famed investor Jesse Livermore, a successful investor in the board room was asked by another why he wasn’t taking profits so he could buy back a stock lower after a pullback.
The answer: “It’s a bull market.” He said it again, and again. He went on, “if I sold that stock now I’d lose my position; and then where would I be?”
Investors are notoriously bad at predicting the market’s direction. That’s because they make decisions based on emotions, and they extend the current trend as if it will never change.
Here’s the evidence: Yale School of Management tracks a Crash Confidence Index, where people are polled about the probability of a 10 percent fall. The results showed lots of optimism in 2007-08, right before the financial crisis.
What were investors’ views when the current bull market began in early 2009? They were more pessimistic on stocks than any time in the survey’s long history. Investors typically zig when the market zags.
Morningstar also found that investors buy high and sell low. They calculated asset-weighted returns on open-end funds and found investors cost themselves about one percent annually by mistiming the market. From my experience with investors, I’m surprised it’s not worse.
Investors should keep in mind that the longer the time horizon the more likely stocks will go up. For example, if you hold stocks for one day then there is a 46 percent chance you’ll lose money (nearly a coin flip).
If you hold stocks for one year then there is a 27 percent chance of losses. A three-year horizon brings a 17 percent chance of loss while a ten-year time horizon yields only a six percent chance of loss.
Holding for long periods is easier said than done. There are always scary events and bad headlines. During this seven-year bull market I’ve bookmarked many stories with headlines like “Get out of stocks!” and “We won’t see another bull market in my lifetime.”
These stories accomplish their goals of getting website clicks, but they are merely distractions for investors.
Over the six years of writing this column I’ve consistently been upbeat on stocks, especially dividend payers. Why? It’s a bull market.
David Vomund is an Incline Village-based fee-only money manager. Information is found at http://www.VomundInvestments.com or by calling 775-832-8555. Clients hold the positions mentioned in this article. Past performance does not guarantee future results. Consult your financial adviser before purchasing any security.
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