The Key To Success In The Stock Market Is...
Stocks stepped lively again on Thursday and had it not been for IBM (IBM) stinking up the joint, the screens would have been green across the board. With "Itty Bitty Machines" lopping somewhere around 90 points off of the DJIA (DIA) the day may not have looked like much to the casual observer. However, the S&P 500 (SPY), Russell 2000 (IWM) Smallcap, and S&P 500 Midcap (MDY) indices all finished at fresh all-time highs and the NASDAQ Composite (QQQ) closed at its best level since early 2000. So, despite the venerable Dow Industrials closing with a red number, it is safe to say that it was a good day to be invested in the stock market.
So Much For The Fear Mongering
So much for the freak-out that was supposed to happen in response to the nation's lawmakers acting like two-year olds, right? So much for the "sell the news" trade that was supposed to occur the minute the deal in Washington was signed. And so much for the fear about the shutdown's impact on the economy.
To be sure, stocks could easily embark on a nasty decline tomorrow. But so far at least, listening to the all the fear mongering offered up by the bears and the press has been a recipe for disaster in 2013. The bottom line is despite all the issues with the Fed, the government, Europe, China, etc., stocks finished Thursday October 17 at all-time highs.
Take a peek at the chart shown below. This is a snapshot of the S&P 500 on a monthly closing basis since 1994.
S&P 500 Index - Monthly Closes
Hmmm... The chart appears to start at the lower left and finish in the upper right. And while the middle section was a bit of a bumpy ride, the fact that the market finished at all-time highs yesterday is still a good thing, right?
For those of you keeping score at home, the S&P 500 is up 21.52 percent so far in 2013 and since the time everyone thought the global banking system was going to collapse in March 2009, the market has advanced 156.2 percent. Not bad. Not bad at all.
Yes Virginia, There IS a Point
The point to what is rapidly turning into a meandering morning market missive is that investing according to what one expects to happen next in the stock market can be a problem.
Take another look at the chart above. This time, pay attention to the gains and losses that occurred during the big bull and bear markets. From 1994 through early 2000, the S&P gained about 235 percent. Then the Tech Bubble bear market took a big bite out those gains with a loss of 46 percent. What followed was a run-of-the-mill cyclical bull market which sported a bottom-to-top return of nearly 90 percent. Then things got very ugly as the market took a 56 percent drubbing during the credit crisis. But then, as day follows night, the next bull has produced a gain of 156 percent so far.
Buy-and-Hope Works, But Buy-and-Sell Works Better!
The real point this fine Friday morning is that the key to long-term investment success in the stock market isn't trading in and out of Apple (AAPL), Google (GOOG) or Tesla (TSLA). No, the REAL trick is to get the big moves in the overall market right.
Want proof? Grab a calculator and let's do some math. Assume that an investor can capture 70% of the gains from each bull market and then miss one-half of the bear markets. The thinking here is that bull markets have historically lasted about three times as long as bear markets. So, assuming an investor waits until a move is fairly obvious, they will still be able to capture a decent chunk of the bulls and avoid a good part of the bears.
Doing The Math
So here goes. The bull market from 1994 through 2000 produced a gain of 235 percent. Seventy percent of that is 164.5 percent. Thus if one started with $1 on 1/1/94, they would now have $2.645. The Tech Bubble bear market declined 46 percent. So, subtract half or 23% and the account is now worth $2.03665. Continuing on, add back in a gain of 62.3 percent, subtract out 28 percent, and add 109.8 percent. The bottom line here is that $1 invested in 1994 is now worth $4.99313, which is a gain of 399 percent.
The question, of course, is how would one have fared if they had simply put $1 in the S&P 500 at the beginning of 1994 and left it there. The answer is that dollar would now be worth $3.77 - a gain of 277.37 percent.
The Winner Is...
So... If an investor was disciplined and utilized a buy-and-sell approach capturing 70 percent of the bull market gains and avoided one-half of the bear market losses, they would have produced a gain of 399 percent versus a gain of 277 percent for the buy-and-hope approach.
Thus, it is fairly obvious that a buy-and-sell method appears to be the superior strategy.
The morale of the story is that having a discipline - almost ANY discipline - is better than either (a) letting emotions guide decisions or (b) setting it and forgetting it. Yes, investing can take some work. But even a basic strategy would appear to be well worth the effort.
Turning to this morning... Now that the debt-ceiling debate on the back burner for a couple of months, traders' focus has shifted to the earnings parade. On that subject, Google (GOOG) put up impressive numbers after the close yesterday afternoon and then this morning the news that General Electric (GE) posted strong returns has helped keep the mood in the markets buoyant. Foreign markets were mostly higher overnight and U.S. futures are pointing to a modestly green open.
Positions in stocks mentioned: none
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