Taking The Gloves Off On The Discussion of Rational Investment Analysis (Part 1)

• IRON100
• July 4th, 2010

 

I took a non-trading/half-business/half-fun trip last week to Cleveland, and as always when I fly or drive, I took along educational CDs to learn something or audio book CDs to pass the time when even the XM Music becomes monotonous or boring. I was asked to review some investment related CDs to see if I would be interested in "buying them" and "joining" some investment related organization. I knew from the first CD that what I was listening to was pretty much garbage, but I decided to listen most closely to the parts of it that were equity-related. In these CDs, there was a former rocket scientist with a Ph.D. who developed research for a one-time major brokerage operation. My blood began to boil after I began to hear the concept that "buy and hold" was the only rational way to achieve "long-term wealth" and how holding for "the long term" was the only way to achieve financial goals. 

I have a feeling that the person who introduced me to this stuff is likely going to read this post, and quite frankly, I hope this individual does. This person has made a ton of money marketing this stuff.  Regardless of that, without mentioning any specifics (either individuals or concepts), I want to blow the "buy and hold" orthodoxy off of its mooring by demonstrating some very basic concepts regarding longer term valuations and trends (measured in months and years), that make true common sense if one has the courage to understand them. 

I also hope that no one in StockTwits management is going to get upset when I write this series. I am not going to point fingers at anyone, but I am going to attempt to define what most "buy and hold" acolytes refuse to define. I want to define what "long-term" really is and why one has to pick which "long-term" environment to which one is referring in order to make comparisons for investment return in equities. That process is not as easy as it sounds or looks. That difficulty explains why so many people fail when it comes to investing well. If you held the most popular indexes over the last 10 years, you would have lost somewhere between 29% and 49% of your funds if they were dumped in 10 years ago. If that is your "long term" (particularly if you retired 10 years ago), I have news for you, you have been (and may be forever) screwed when it comes to outliving your savings. 

In order to discuss this different way of thinking about rational investment analysis, I am even going to quote some sources with which I often disagree, like John Mauldin, William Bonner, and even Peter Lynch (who many regard as one of the best growth investors of all time). I am also going to dig into the works of AAII’s (www.aaii.com) contributors on technical analysis (who also write for Market Technicians Association and Barron's). I realize that my disagreement with "experts" means nothing, but I am an over-educated South Carolina redneck who is self-educated on the subject of investing who had read and studied about 300 or so books on the subject over 35 years (I did a body count as my cousin and I went through the stacks of books I have in a library I am going to put up in one of my office/sitting rooms). I have also survived every major meltdown (including 1987, which taught me a great but brutal lesson about market dynamics). 

I think I can bring a layman's eye to this subject that will help you become a better investor and diviner of market environments. It is so important that one becomes his or her own financial manager. It is also important to understand the economic environment in which one lives so that one can maneuver through the often dangerous potholes and pitfalls of investing. It is my hope that I will destroy the "buy and hold" single-minded orthodoxy and replace it with a more nimble yet calm approach to making good investing decisions. It is relatively simple too. One does not have to be a "rocket scientist" to understand it. One does have to respect economic cycles and history to appreciate it though, along with some basic technical analysis too. 

It's the fourth of July weekend folks. I am cutting this one short as a teaser for what is coming ahead. I would also like your comments and discussion about what I am going to write as well. Leave your comments or send an e-mail to buffalotrader100@gmail.com.More good information is flowing your way soon. I want to thank the StockTwits community again for supporting this blog.

Tickers: AAII, Barron's, buy and hold, experts, long-term, long-term investing, rational investment analysis, technical analysis, trends

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