A10, Stock Trader Dude

I’ve been thinking the stock market was due for a major decline since 2004… but I got it wrong. The market index went where it wanted to go – on it’s timeline – not mine. I had bought puts on the index years ago and quickly won and lost or lost and won. But when I won or lost on those particular bets it was done with risk capital, money not essential to providing for myself in any way. I simply wanted to test a belief. But you, those out in stock land, who don’t understand how or why the game is played, referring to a post last week titled Sell, sell now, you fool may help you realize that no one is going to save you from your own poor decisions. 

A retired lady asked me in a panic about what she should do – “Is my money safe?” Of course not, cheap stocks can get cheaper, her money had been shifted into a money market fund years ago but she had one particular stock holding remaining and it hadn’t been doing much of anything other than slowly going down over the past few years and working up part of the way only to slowly decline. She claimed she doesn’t need the money for her retirement if the stock declines (she acquired the shares twenty to thirty years ago, perhaps more), but you never know when an emergency will arise. I asked her to think about the solution logically: If you short the stock, you are hedged from any further decline (although you are on the hook for any margin interest), and if you buy in-the-money puts it will cost you several hundred dollars, and if you sell out-of-the-money calls and use that money to buy out-of-the-money puts the partial hedge/insurance on your position doesn’t cost you anything. She is protected from a worst-case scenario: PAWS (plenty of almost worthless stock). This is when you are stuck with a holding and hoping it goes up so you don’t lose almost all of your money on it. This kind of situation produces stress – and it could take years for a particular stock to recover. There is only one situation that must be planned for: you must accept the risk of PAWS – and for those that dispose of holdings in their retirement accounts there are no tax consequences – so, why not use a little logic? If your stock holdings go up a little, it doesn’t change your financial standing, if your stocks double in price – great, but that outcome isn’t likely (so why are you still hanging around?), and if your holdings decline a little from the price you paid it doesn’t materially affect your financial standing. There is only one case that changes your financial standing significantly adversely: your holdings go down significantly and stay down. That’s the only way you really lose. The choice is yours, while you still have one.

The title reflects one of Buffets favorite sayings: “Life is like a snowball; the important thing is finding wet snow and a really long hill.” The author states that it is not an investment book and that, “Part of the book’s point is that while you can learn from him and get some ideas, you can’t really replicate his feat. It was very hard to do what he did, and part of it had to do with the times he lived in.” Writing the book took five years and the author noted that Buffet didn’t tell her how to write it and didn’t ask for any changes. “He said he really wanted me to get at the truth. And whenever his version differed from anyone else’s, he wanted me to use the less flattering version.” So, how do you get rich from Buffet’s advice? The best answer I’ve heard is that you don’t have to invest in stocks at all, although not confirmed by the author, she received mid-seven figures for an advance. For the average person or investor, wealth isn’t locked up inside the market; it’s found in distributing ideas about the market. That’s a great return on her time, instead of fussing around with choosing stocks over the last five years she simply talked to Buffet about his childhood – and he’s the one who suggested she should write a book one day, although he never suggested any topics.

The stock market works on the greater-fool theory, you buy something in the hope that you can sell it to someone else for more than you paid. Even in good times it doesn’t always work, as there are shortages of fools from time to time. What retail investors don’t see is that the days when technology shares were rapidly moving up and creating wealth for their founders and those that bought early enough and held for a few years are long gone. So, if the conditions for easy money are gone, such as an abundance of fools with money, why are you still invested? 

I think the answer is that the retail investor has been consistently lied to about long-term investing and wealth building in the stock market: specifically that holding stocks for the long-term is common sense. It’s not common sense; it’s been disguised as common sense. Let me explain: Most retail investors have no business being in the stock market, they got in due to going along with the belief that it is a good way for them to build wealth and prepare for retirement – now, and now is the only time that matters, because if you lose your money now “in the market” there may not be a later to make it back. As a precaution, wouldn’t it be wise to sell investments that you do not know enough about? If you sell and your stock holdings significantly decrease in value you will be better off mentally, emotionally, and financially and you still have a chance to buy those stocks back cheaper. What this means is: If you sell now – you have a choice! If you hold and your investments lose substantial value and do not recover for many years, who’s going to bail you out? If you sell and the market recovers with more fools and stock prices go up – you miss part of the move, but it will not make you rich even if stocks go up, it will not make you secure about your holdings if the market goes up, it will only matter if your particular stocks go up very, very, very far. And how likely is that is that, especially if you didn’t benefit during the easy money of the tech bubble? If you sell, and the stocks you held go up, you still have a choice to buy them back, and most importantly when those stocks are going up, that’s at least proof that there are some fools going into them. The worst situation is to find out that most of the fools are out and you’re stuck with stocks that aren’t worth much to most of the remaining buyers. 

Fortune magazine published an article online titled, What investors should do now, but Fortune doesn’t get it, it’s not about what they think, it’s not about fundamentals – it’s whether you’re invested for the right reason to begin with. The Fortune magazine article clearly states: We don’t think the financial system is on the verge of collapse. Fine. Neither do I. That is not the point. The market fundamentals aren’t strong, and there is no instant way to change the market temperament to the euphoria of 1996 to early 2000. It is in those exceptional periods where it is possible for the unsophisticated retail investor to make large sums of money. But getting back to the article it states: By our count some 300 articles were published last month telling investors “don’t panic” or “not to panic.” Urging calm is one thing. But too much soothing talk implies that there are no lessons to be learned. What’s the use of a vertigo-inducing bout of market turbulence if the only conclusion is “stay the course”? 

Stay the course? The course hasn’t been good for you for quite some time. If the road you’re on doesn’t appear to be getting you to your destination with your financial vehicle in good working order, get off that road. For the past fifteen years you’ve heard promises that you’ll be well off with long-term investing. Promises from institutions that took your money, promises injected into the media, but if your holdings go down substantially and stay down for years, have you been promised anything other than bearing the burden of the risk. The media and institutions will not pay your bills and you think they’ll share in your losses? The 300 articles telling you to hold on is a warning sign – they need time to get out first! 

Here’s the best part of that article: Here’s another reason to be concerned: The professionals managing your money haven’t gotten this market right. Consider that at the market low on Sept. 17, only five diversified U.S. equity mutual funds – out of a universe of 9,100 – had positive total returns for the year, according to Morningstar. FIVE! Even after the market rebounded, there were still only three funds with returns this year of 10% or better. 

Did you get that – you’re risking your life savings for a 10% return? Good luck, the important thing to remember is that even if the stock market declines and stays down for an extended period the rich people will still be rich, perhaps less rich, but what about you? No one is going to bail you out of picking the wrong funds or stocks and diminishing your capital. A few funny books that kind of relate (Expert stuff):Bailout shirt: (found on page 3)