{"id":25776,"date":"2011-12-05T09:30:53","date_gmt":"2011-12-05T14:30:53","guid":{"rendered":"http:\/\/countingpips.com\/fx\/2011\/12\/05\/why-this-market-truism-just-isn%e2%80%99t-true\/"},"modified":"2011-12-05T09:30:53","modified_gmt":"2011-12-05T14:30:53","slug":"why-this-market-truism-just-isnt-true","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/12\/05\/why-this-market-truism-just-isnt-true\/","title":{"rendered":"Why This Market Truism Just Isn\u2019t True"},"content":{"rendered":"

Why This Market Truism Just Isn’t True<\/a><\/p>\n

by Alexander Green<\/a>, Investment U<\/em> Chief Investment Strategist
\nMonday, December 5, 2011: Issue #1657<\/p>\n

In my first book, The Gone Fishin’ Portfolio<\/em>, I made a confession that startled some readers…<\/p>\n

I retired from the investment services industry while I was still in my early 40s, but many of my clients had not become financially independent. This was not because I advised them poorly. I dealt with my clients honestly and gave them the best advice and service I could.<\/p>\n

Yet, in many ways, they operated at a disadvantage. Some had a poor understanding of investment fundamentals. Others found it impossible to commit to a long-term investment plan. Many were simply too emotional about the markets, running to cash at the first hint of danger.<\/p>\n

Contrarian instincts are rare, too, I learned. Few people are emotionally stirred by low stock prices. But every time there was a correction, a crash, or financial panic, my Scottish blood would surge, my pulse would rise, I’d rub my hands together, and start buying.<\/p>\n

My clients, on the other hand, often did just the opposite, sometimes because they were too nervous but often because they bought into the old chestnut that a good investor doesn’t buy into a market downturn.<\/p>\n

“The trend is your friend,” they’d say. Or “Don’t try to catch a falling knife.” This is surely the conventional wisdom in some quarters, but it’s not particularly wise. Here’s why …<\/p>\n

For the last several months, traders have obsessed over problems in the Eurozone and the strength (or perceived weakness) of the U.S. economy. Taking a decidedly downbeat view, the market had a pretty horrendous November. But sentiment can turn on a dime and stocks can put on a furious – and completely unexpected – rally.<\/p>\n

If you don’t already own stocks, it’s tough to catch the train after it has left the station.<\/p>\n

Yet many gurus, including growth-stock advocate William O’Neill and his widely read publication Investor’s Business Daily,<\/em> often insist that you shouldn’t but a stock unless the market itself is in a confirmed uptrend.<\/p>\n

That may make sense in theory, but it often fails in practice. For instance, on page one each day, that paper reports whether the market is in a confirmed uptrend or downtrend. (And sometimes hedges, using language such as “Uptrend Under Pressure.”)<\/p>\n

As we all know, this has been a volatile year for the market with the major indices bouncing up and down repeatedly. But you could hardly have chosen a worse strategy than to wait until the market was in a confirmed uptrend before buying. All that meant was that you bought into every short-term spike and then hit your trailing stops over and over again. (It must feel like banging your head against the wall.)<\/p>\n

The Oxford Club<\/em> has hit a number of its stops this year, too, sometimes protecting profits, other times protecting principal. But by buying great companies when the market was under pressure, we ended up with a lot of attractive entry points and plenty of both realized and unrealized profits.<\/p>\n

True, if stocks go into a secular bear market, you can end with losses no matter how well you timed your entry points. However, you can never know whether a market drop is merely a correction or something more ominous until you are looking in the rear-view mirror.<\/p>\n

You have to stick your neck out occasionally, pick your spots and buy stocks. If you don’t, what are you going to do? Buy bonds yielding 2.5 percent? Hold a money market paying less than one-tenth of one percent? It’s tough to beat inflation or meet your financial goals that way.<\/p>\n

Let me make one thing clear, however. It’s most definitely a mistake to buy a troubled company that’s in a downtrend, no matter which way the broad market is heading. (That only works for those with exceptionally long time horizons – and often not even then.) But buying great companies when the broad market is a downtrend gives you a chance to obtain good prices on fine long-term investments and take advantage of tradable short-term rallies, too.<\/p>\n

The next two months are traditionally one of the strongest periods for the stock market. No one can say, of course, whether that tradition will hold. But it’s a reasonable strategy to buy great companies when the market is down.<\/p>\n

If your goal is to sell high, you have to start by buying low. And market corrections – like the one we’ve seen lately – give you an excellent opportunity to do just that.<\/p>\n

Good investing,<\/p>\n

Alexander Green<\/p>\n

\n<\/img><\/a> <\/img><\/a> <\/img><\/a> <\/img><\/a> <\/img><\/a>\n<\/div>\n

<\/p>\n

Article by Investment U<\/a> <\/p>\n","protected":false},"excerpt":{"rendered":"

Why This Market Truism Just Isn’t True by Alexander Green, Investment U Chief Investment Strategist Monday, December 5, 2011: Issue #1657 In my first book, The Gone Fishin’ Portfolio, I made a confession that startled some readers… I retired from the investment services industry while I was still in my early 40s, but many of … <\/p>\n

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