Trend: The Buy and Hold strategy is testing the faithful as the bear market grinds down portfolios.
Mike Swanson describes the why the Buy and Hold belief system fails in a bear market. Excerpts below.
Link: My Thoughts on the Stock Market Going Forward - Mike Swanson (02/25/09) | WallStreetWindow.
...everyone now realizes that there is a bear market, most people still are just trying to play the same games of buying stock picks or holding on in the expectation that everything is just going to get better. Even if they are downbeat about the economy they are not translating what they know is happening in the real world to their investment life.
Most of the time people decide to invest in a sector - or in the stock market - and then adopt a rigid belief system to back up those investments. Usually this involves believing in a story of what you think is going to happen in the future that will make your investments pay off.
In the 2000 bear market most people had been conditioned by the eighteen year long bull market that preceded it to believe that stocks go up forever and therefore all dips should be bought. As a result the masses just held on and got slaughtered.
Just a few years ago - those same people jumped into real estate, speculating on condos and housing in the belief that since housing prices have gone up for the past twenty years that they would go up forever. That housing is the one true "safe" investment. These people learned absolutely nothing from the bear market in stocks and are now bankrupt as they get foreclosed on.
Right now in the stock market there are people just holding on who apparently learned nothing from these two bear markets that have occurred in just the past few years. Even though it was absolutely clear to anyone paying attention a year ago that a vicious bear market and slowdown in the economy was only beginning they ignored the real world and just held on into the Fall stock market crash.
They are still holding on now.
That is why I think the stock market when you think about it right now has more dumb money then it probably has ever had in its entire history in it - because the people holding on now should have learned from the last two bear markets, but they didn't. This bear market won't end until these people sell out of it, and we're going to see an occasional 10-20% rally in the market averages occur from time to time to keep their hope alive.
But when it comes to the market even if people are bearish on the market as a whole or the economy they are still focused on buying the right stocks that they think will just go up no matter what. They might think oil stocks are going to go up or gold stocks or some other pet sector that they like - and they have stories and narratives about the future that they believe in and think will make them go up in time. They may think they are in the one true "safe" investment.
Everyone does this.
The problem is that nothing in the future ever happens exactly as you expect it will. When things don't happen exactly the way people plan then they just sit their in disbelief and don't adjust to what is really happening - just like all of those who just held on during this bear market did - or else they just rigidly keep on believing what they thought was going to happen will happen, thereby ignoring reality. People who do that often come up with excuses - like it would go the way I think it if wasn't for manipulation.
To be a successful investor in the market you have to be willing to adjust to changes in the economy and the stock market. To do that you must be willing to recognize the fact that you can't predict the future and things you may believe in may not happen the way you think they will.
... we all have a tendency to think about the future and what we think is going to happen. I've talked about times that my thinking has evolved and changed, but the problem is most people just get a scenario in their head and keep believing in it no matter what. But no one can predict exactly what is going to happen and things change.
The most important thing to do to make money in the stock market is not to sit there with a set of rigid convictions, but to understand how to read market trends and then to adapt when those trends change. This will give you flexibility and keep you aligned with the big trends of the market - which is how money is really made.
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