Trading Vs Investing

Let’s explore the great Buy & Hold theory

In this page I’m going to blow the buy and hold theory out of the water, I’ll also expose the real reasons why financial “experts” recommend a buy and hold strategy.

I would urge anyone reading this page to obtain a copy of “Super Trader” by Dr. Van. K. Tharp – read and digest the Preface of that book as it shows you the pitfalls that catch most people out.

If you speak to a financial adviser or fund manager they will throw at you a load of figures, quotes and statistics proving to you that buy and hold works – if you select the right period to compose your data you can make anything look good.

In certain situations IT DOES [Buy & Hold] work – I have no problem accepting this.  Before we get into this, let’s first answer some critical questions:

  • Why are you investing? Is the end result life specific i.e. retirement, school fees, university, health etc
  • How many years will you be investing for?
  • Are you prepared to get involved and learn to make sure your money remains efficient and profitable to your cause?

You need to fully understand and answer those questions at least once a year, incase your circumstances or reasons for investing change.  If you’re like most people then you will seriously consider investing from the age of 30 onwards and it will probably be for your retirement.

To me the whole point of investing or trading is 1) To make money and 2) To keep hold of that money!

So if your starting at age 30, when do you retire? usually at age 65 (ish) so that’s 35 years of investing.  I call this your “Investment Life”

Here’s what I ask:

  • What happens if you don’t start until later in life?
  • Can you 100% predict what the stock, commodity and bond markets will do during your “investment life”?
  • What happens if your unlucky and invest at the wrong times and effectively invest in a “lost decade or two” or sideways moving market?

I can tell you if this happens to you, you will not be happy, you’ll be blaming your adviser, the fund manager and even the government – they don’t really care as your investments don’t really affect them directly, yes they charge you for their services and make money even if your investments fall in value – they still get paid! – yet at the very end it’s you and your life that’s affected.

Let me at this stage clear one critical point up, in the ultra long-term the market does rise & go upwards – it’s due to mankind’s natural progression, growth and advancement on a number of fronts, this leads to economic growth and advancement and markets rise and rise.  The stock market is approximately 200 years old and during that time, overall it has risen – but unless you can be 100% certain and guarantee that your “investment life” will be during a rising (Bull) section you have no choice but to consider the risks.

Take the periods of September 1929 to January 1953 – the Dow Jones fell from the peak  (327) in 1929  and did not reach the same level (327) until 1953 that’s 24 years for the market to get back to break-even!  The reason I pick on this time period is that someone would have bought in the month leading up to the peak. 

Let’s look at the time period 1965 to 1983 – The Dow Jones was in what we call a sideways trading range for 18 years!

These periods of time would have affected many many people’s “Investment Lives” – If you were of the “right” age for investing and building funds for retirement you’d have no way of avoiding these painful and unprofitable periods – believe me they will ALWAYS happen and they cannot be controlled.

I don’t have the graph to back that statement up, but you can find this evidence in the following books The Layman’s Guide To Trading Stocks &  Elliott Wave Principle: Key To Market Behavior

Take a look at this chart: (click the chart to make clearer)

Good time to Buy and Hold?

Was this a good period to be a buy and hold investor for 14 years?  Obviously dividends would have been paid out during this period and would return approx 4%, but I’m focusing on the GROWTH aspect – dividends are not guaranteed and as history has proved they can be withdrawn in times of trouble (again the masses have been convinced of the importance of dividends and they’ve come to rely on them and expect them – if a company is going under they’ll drop the divi’s like a hot stone in an attempt to survive) and in any market condition if your dividends are larger than your capital growth, something somewhere has gone severely wrong

How many Economists, fund managers, financial advisers or other financial experts told you to sell your holdings at the tops?

I can tell you it was not a good time to be a buy and hold investor, but it was a good time if you had been a trader!

Can you see just how relevant the timing of your “investment life” is with what the markets are doing?  You have to accept the fact that the market will do whatever it wants, whenever it wants and in whatever manner it wants – you, me, financial experts, economists, fund managers, financial advisers or the government do not have any control at all over what the markets do, if they did we’d never ever have major financial crashes or stock market falls.

Okay I hope you get my point, Dave Landry in his book The Layman’s Guide To Trading Stocks
details common market myths you can read at your leisure, this book is on my recommended reading list.

Now if we look at 1982 to 2000 – the Dow Jones virtually rose and rose! If your investment life was 18 years at that time = perfect timing, maybe not intentionally but great timing – you’d have thought you were a great investor – THIS is the time to Buy & Hold – it is the only time to be a buy and hold investor!

Can these cycles of good and bad market conditions be timed and predicted? – Yes they can, this is an area I did not know existed before 2012!  This information to the buy & hold investor is vitally important – refer to the W.D. Gann page for details of how to purchase it.  This particular cycle has been pretty much spot on since the 1800’s, well in fact since the US stock market was officially formed 17th May 1792!  The markets of 2009/2000/1987/1982 etc were all predictable, along with many other dates.

Ever wondered why the adage “Sell in May” applies to the markets?  take a look at how the market reacts around that time every year – theres a reason this sometimes has an adverse effect on the market (refer to my short-cut to Gann page)

Now refer back to the chart of the FTSE100 index (the UK’s main index) If you had a system that kept you OUT of the big declines but you were in on the rises you’d have made approx 150%+ growth in that same 14 year period = 10.71% + dividends per annum on average!  You could have returned far more by shorting the market when it fell too!  There’s many myths about shorting the market which are simply peddled by uneducated reporters, shorting the market should be just as comfortable to you as going long – and contrary to popular thought it’s not the cause of falling markets – markets fall because buyers have stopped buying, there’s a difference!

So as can be seen by trading the index during a sideways or bear market we can outperform the overall market during that time by NOT following a buy and hold strategy. 

Now what if I told you that it was possible to obtain (fairly easily) 30%+ annual profits from the markets by trading rather than investing?  Let me show you how:

Take a look at these charts – all the details are on the charts

Trading Range Example

Downtrend Example

I am that confident in the win:loss ratio of my system that I have no qualms at all of putting on big positions.  Also I think in terms of %’s and probabilities, so if I know in advance roughly the £ outcome of each trade.  Also as a professional I also know exactly how much I can lose on the trade should it back-fire on me, which they occasionally do!  nothings a sure-fire thing in trading!

I urge you to think clearly and logically about taking say 20% a year from the market on your entire account, compound the returns over x years to see how powerful taking just 20% a year from the markets is – So what if the market does 50% in one year – It won’t continue to do so as it’s long-term average is around 7% annually!  So your 20% will over time beat it hands down

Fund Managers and Financial Advisers

  • Fund managers make their money by charging fees, even in a falling market, so whatever happens in the markets its win:win for them – hence why they tell you to buy and hold!
  • Fund managers are pegged to a sector, their performance is measured and compared to that sector – if the sector makes say 2.3% growth for a year and the fund grows by 2.4% they’ll market themselves aggressively (to attract new money into the fund) as having outperformed the sector
  • conversely in a market crash, if the market has fallen by 35% but the fund’s only fallen by 34% they’ll claim victory and market out-performance even if the net result is they’ve lost 34%!
  • These funds are forced (due to rules) to not reduce share holdings below a set level i.e. 70% – that means that when a market crashes that fund cannot sell stocks and sit in cash (which is the sensible thing to do!) it would have to remain 70% invested, in a falling market! each fund will have its own set of governing rules if applicable, but most funds are governed by this!  This is another buy and hold reasoning, although they won’t tell you.
  • Many fund managers have only experienced bull markets, not a major crash
  • Financial Advisers – are great at strategic planning – but not at investment decisions.  they are not investment experts, they listen to the fund managers as they deem them experts and then pass on the rhetoric down to their clients.
  • This is one of the main reasons people get burned with investments, they listen to the wrong advice.  It is true that the adviser is one step higher in the information chain that your average member of the public, but that does not mean they understand the markets.
  • Financial advisers have so many clients that they could not possible contact them all in one day to advise to get out of the market and into cash – in the UK they’ve so much red tape that they have to document everything and by the time they’ve decided what action to take, documented it (just in case) contacted clients, await client responses, chase clients up that failed to respond, action taken, follow-up documentation to client + report – the markets moved on!!
  • The above mentioned “Professionals” are probably not aware of the cycles I mention above that have been in force since the 1800’s, as you need to look at data from 1792 to see these cycles occurring.  Long-term price data is not freely available, I know for a fact that most IFA’s don’t look past 5 years worth of data as I’ve worked with many and used to be one.

Let me make this clear, Financial Advisers (I used to be one) do a great job in their ability to plan and help people with their finances but they simply aren’t investment gurus, they like to think they are but that guru would be able to tell you when to invest and when not – ideally prior to the market moving but they very rarely do. At best financial advisers are just picking fashionable investment funds.

Let me repeat this again, Buy & Hold will work during a rampant bull market, I consider myself an expert in financial matters and especially the markets and I would not like to bet everything on a supposed new bull market, at best investors that employ a buy and hold strategy are gambling with their financial future and lifestyle, the advantage that they have is a 200+ year bull market, If the market moves sideways they’ve no chance – I have evidence to support the fact that most investors buy towards the tops so this statement is made with a high degree of certainty that the masses would be trapped in losing positions during market declines – that evidence can be found in the Elliott Wave material on this site.  The problem we have now is that from 1982-2000 we had a bull market for 18 years, most people only remember the market going upwards, so that’s what they expect!  Ignoring the fact that at some stage it has to correct.

I know someone who in the 2006-07 boom cashed in a sizeable investment he had with a fund manager and decided to spread the “risk” by buying a handful of UK banks! Up they went and then bang!  Now, that chap needs that money to help repay his mortgage!  His reason for doing so was that markets always go up, he could do a better job than his fund manager! and he did not wish to miss the next move up, also he suddenly became a market expert! – well that move up still has not come, some 4 years later – is he still a market expert? Sadly no, he freely admits that he has not got a clue and his timing was way off, is he still holding onto those bank shares – he sure is!

There is nothing wrong with doing your research, looking at a chart, buying the stock and setting a 10% stop-loss – these people are Traders though as they’ll usually bail all or part of the position once a stock has made them 20%+.

Financial Advisers and Fund Managers will also tell you about the merits of DIVERSIFICATION; read this [free] report and draw your own conclusions:

To be fair Buy and Hold investors have NEARLY got the simplest way to trade/Invest down to a T, BUT, the thing that lets them down is they will ALWAYS be invested during big down times – THIS is what lets them down in the long-run

Market Truths

  1. The market can do anything at anytime and it often does
  2. Markets always move prior and predict economic downturns & expansions
  3. Markets move because they have to, driven by fear, greed and emotion
  4. A lack of buyers can cause a market to FALL, not people selling!
  5. Experts are often wrong
  6. Governments like to pretend they’re in control when in fact they simply react to events
  7. Since 1880 the S&P500 index (or equivilant) has produced 10 year annualised returns of 9% per annum

Are Markets Predictable?

Hell yes they are – You seriously need to study the entire history of your market (finding reliable accurate data is hard though), but  the market moves in significant waves of alternating up and down waves/cycles – This is not work that I have discovered for myself and as such I’m not prepared to publish it here, If you would like to research further then head to my W.G. Gann page and buy the shortcut I offer as the course I recommend contains these phases & cycles.

It requires effort, but after studying, research and applying that knowledge you will be able to predict with high probability the following:

  • The next major bull (decade+) market cycle
  • When that major bull market will expire, leading to……
  • The next major (decade+) bear market cycle
  • All the mini cycles within these major cycles
  • The best time to be in the market and out of the market
  • The real reason markets move – the cause and the effect
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