The Sixty-Plus Society and Long-term InvestingLong-term investing parallels long-term living in certain respects. Markets have ups and downs and life has its ups and downs. That is why markets are called markets versus straight-line investing and life is summarized up by experience. We don't call life a market but the more we learn about it, the better prepared we are to understand it. As we grow older, the former bumps in life tend to be smoothed. Look at a ten to twenty year chart of the Dow or your holdings. Note that this approach smoothes the day-to-to-day price fluctuations and, long-term, the overall effect has been an upward climb in values. Day-to-day price fluctuations of your holdings do not represent the inherent value of your investments. Knowing more about our investments requires learning on our own so that we are not dependent upon advice-for-a-price. Thus we can have assured confidence in our financial situation. Remember, The Motley Fool has taken the mystery out of investing at no cost to you! Stocks are affected by three markets: 1. The overall markets such as the NYSE, Amex, and the Nasdaq. The market, as a whole, influences most stock prices. More correctly, the sum of all stocks directs the market averages. 2. The industry a particular stock is associated with has its market within the broad markets. 3. A given stock has its own market within its industry and the broad markets. 4. If you want to throw in the world markets as number four - go ahead.Bonds, are directly affected by interest rate trends, their ratings and the health of their issuers. All markets are affected by external factors such as interest rate fluctuations, changes in the economic indicators, and emotional reactions. We should know that emotional decisions can work against us. It is easy to philosophize about the value of buying and holding long-term while the market is going up. What about down markets? Uh oh! We just lost our era of good feeling and now we wonder if the market is the place for our assets.We don't become nervous when things are going our way. But what about a market break or a sell-off of one or all of our holdings? How can a down market be going my way? When a popular store puts its merchandise on sale at 50% off, people rush to buy. When the market drops and puts stocks “on sale” - people think the world is coming to an end, and stocks are risky. Oh woe is me.At times like this, we should focus on the fact that the country is still in business and, looking back just 100 years, the economy has done nothing but grow over the last century. Isn't this why we are in the market in the first place? Look at the Dow! It has grown from 100 in 1897 to its current levels. Long-term doesn't have to be a century but do you really think the economy is going to stop? The only constant is change and change does not move in a straight line. All of this is easy to understand while our holdings are up. What was our GDP in 1897? What is it now? We Sixty-Plusers, have a psychological framing that can work against us in terms of the current market. Our parents drilled the monetary lessons of the Great Depression into our very being. Long distance was to be used sparingly, and when coke raised its price from $0.04 to $0.05 it caused a stir. During the depression, folks paid to drink sugar water, that alone should have told people to buy KO. But back to the way we look at things. Stocks selling at 10 times earnings were normal and when a multiple increased to 20 times, this was a high-flyer. Over the years, mutual funds have been proliferating to the extent there are more funds than stocks on the NYSE. Where did the money come from to buy these funds? The economy has been diligently growing and producing, with people earning the where-with-all to invest. P/E ratios have been expanding. More dollars are chasing “fewer” investments.Tom Gardner wrote: The Psychology of Investing Part 2. He refers to Massino Piattelli-Palmarini who authored Inevitable Illusions. Massino says our psychological framing is historical. Not up with the times. The market took years to throw off the 1930s negative approach to the market. Over the years, the economy has grown, new industries have come into being and things we could not imagine just a few years ago, exist today. The internet is one and, its off-spring, e-commerce is now a reality. In order modernize our thinking, we Sixty-Plusers will have to forego our depression era psychology and move into the now. This does not mean that we should become imprudent. Sitting on cash for the last ten years has been improvident to say the least. When our kitty spills her milk, we don't cry, we just clean it up. Now is just as good a time as ever to rethink our approach to the markets.We investors are an interesting group. We research a stock, ponder its merits, note it has had increasing earnings almost every year (cost of sales is low), note that its products are sold over very broad markets, etc. We conclude that our investments are sound, yet we review prices on a daily basis, agonize when they go down and exult when they go up. Never mind that we cannot remember our cost basis if we still have one. Do daily, month-end or year-end closing prices tell us anything about the merits of our investments? Do these prices tell us where our portfolio will be in ten, twenty years or more? Do they tell us about any company's long-term financial condition? These micro attempts at portfolio evaluation are nothing other than pinheads on the highway of successful long-term investing. Reviewing daily stock quotes is more entertainment than not.Most will agree that owning real estate is a safe bet and none safer than a home. A home makes you feel comfortable, secure and it is the best place to be. You have come to love your home. The catch is that the lumber, brick and mortar doesn't know you love them. Understand that your stocks don't love you either. The AT&T your granddad willed to you can't even spell your name. Once inflation inserted itself into the economy, it became every American's right to have their home go up in value every year. Just a few years ago, 1973-74 to be exact, this right was taken away. The market for real estate declined along with values. Construction for commercial projects simply stopped. The Dow dropped to the mid 500s from 960 taking many issues with it. It would take five years for the Dow to re-approach 960 and for real estate values to lift out of the doldrums. Once the economy absorbed the fuel shortage shock and an overly tight monetary policy, the economy and the real estate markets re-established former values. Ann Coleman (TMFAnnc) very interestingly notes in an article that the Foolish Four rose 37% during the 1973-74 period. That was an unbelievable performance at that time. Even if I had known about the F-4 then, would I have stayed the course? Don't answer that! If you lived in a neighborhood for a lengthy period prior to 1973, you have seen real estate values hold steady, decline and move upward. Things appeared stable, orderly, calm and pleasant. No ups and downs at home, right?Let's suppose you want to sell a piece of real estate for $100K appraised value. You need the cash to put into your business right away. The For Sale sign goes up. You have no offers. Your property is momentarily worth $0 since you cannot turn your asset into cash. You receive an offer of $90K and now your property is quoted at $90K if the check clears. The next offer of $95K now values your property at that price. The point is, that if you value real estate on a day-to-day basis, you will see large price fluctuations. Inflation and the momentum of the economy have driven real estate values just as they do affect the stock market. This does not mean that values increase on a straight line. The economy has its ups and downs, as do all markets. The trick is to ride out the bumps with the knowledge that the country is still in business.Day traders are concerned hourly about their stock prices and expect the market to perform to their specifications. No one has informed the market about this nor can they. Long-term investors use the force of the economy to drive markets. The effect is to use the market, which is based upon the economy, to perform according to the long-term investor's portfolio requirements. J.P Morgan when asked what the market will do said, “It will fluctuate.” When the market is going down and we have indigestion worrying about our portfolios, let's calm down and look at the fallacy of trying to time the market and why we should not be come alarmed. No one knows, in advance which way the market or stock is going to move over the short-term. Long-term, the economy is going to advance and so will our asset values.The following is excerpted from TMF - The Perils of Market Timing Dec. 27/99The Costs of Imperfect Market TimingNot only is it impossible to accurately time the market, but the costs of anything but perfect market timing are severe. Being out of the market during only a few of the best days or months can ruin a portfolio's long-term returns.For example, consider these three examples:A) Had you put $1,000 in the S&P 500 at the end of 1981, your stake would have grown to $25,584 (including reinvested dividends) by the end of 1998. But if you had missed the 30 best days (defined as the days with the highest percentage gain) of those 4,400 trading days, you would have ended up with $4,549, 82% less. (Source: Dow 100,000: Fact or Fiction.)B) Had you invested $1,000 in May 1970 and held for 14 years, you would have $3,000. But if you had missed the five best days, you would only have $2,000. (Source: Against the Gods: The Remarkable Story of Risk.)C) Had you invested $1,000 in January 1978 and held for 20 years, you would have $21,750. But if you had missed the 15 best months, you would only have $6,010, 72% less and only slightly better than the $4,080 you would have had from investing in T-bills. (Source: Ibbotson Associates, Stocks, Bonds, Bills and Inflation, 1997 Yearbook.)Here's the final piece of data against market timing. Consider three people who each invested $1,000 per year in the S&P 500 Index from 1965 to 1995. Investor A bought on the first day of each year, Investor B -- the world's best market timer -- bought at the lowest price each year, and unlucky Investor C bought at the market's peak each year. Here are the results:Investor A (invests on first day of the year): 11.0%Investor B (invests at market nadir each year): 11.7%Investor C (invests at market peak each year): 10.6%As you can see, the differences among the compound annual returns earned by each investor are small. (Source: Peter Lynch, Fidelity Investments brochure, "Key Things Every Investor Should Know.") The Costs of Imperfect Market TimingNot only is it impossible to accurately time the market, but the costs of anything but perfect market timing are severe. Being out of the market during only a few of the best days or months can ruin a portfolio's long-term returns.For example, consider these three examples:A) Had you put $1,000 in the S&P 500 at the end of 1981, your stake would have grown to $25,584 (including reinvested dividends) by the end of 1998. But if you had missed the 30 best days (defined as the days with the highest percentage gain) of those 4,400 trading days, you would have ended up with $4,549, 82% less. (Source: Dow 100,000: Fact or Fiction.)B) Had you invested $1,000 in May 1970 and held for 14 years, you would have $3,000. But if you had missed the five best days, you would only have $2,000. (Source: Against the Gods: The Remarkable Story of Risk.)C) Had you invested $1,000 in January 1978 and held for 20 years, you would have $21,750. But if you had missed the 15 best months, you would only have $6,010, 72% less and only slightly better than the $4,080 you would have had from investing in T-bills. (Source: Ibbotson Associates, Stocks, Bonds, Bills and Inflation, 1997 Yearbook.)Here's the final piece of data against market timing. Consider three people who each invested $1,000 per year in the S&P 500 Index from 1965 to 1995. Investor A bought on the first day of each year, Investor B -- the world's best market timer -- bought at the lowest price each year, and unlucky Investor C bought at the market's peak each year. Here are the results:Investor A (invests on first day of the year): 11.0%Investor B (invests at market nadir each year): 11.7%Investor C (invests at market peak each year): 10.6%As you can see, the differences among the compound annual returns earned by each investor are small. (Source: Peter Lynch, Fidelity Investments brochure, "Key Things Every Investor Should Know.")A long-term strategy of investing in stocks is not only the safest and best investment approach, but it is also a major key to avoiding taxes. Taxwise growth beats ordinary income. To most of us, the idea that we sell a fraction of our long-term investments to yield income, may be new but it does make sense. What is the tax on a long-term gain? What is the tax on your “unearned” income?” While your investments are compounding their growth no tax liability accrues and this is significant. Also think of this, if a company chooses not to pay a dividend, which is taxed, but instead retains the dividend to grow the busi-ness, isn't this the highest and best use of corporate cash? Search Glassman and then choose Dow 36,000. Ann Coleman writes a great article on this and refers us to James Glassman who writes about a 36,000 Dow. Jim rightly states that earnings not paid out as dividends allows more capital to work for you untaxed.Let's do a different take on how income can accrue to you out of stock price growth versus earnings paid to you as cash dividends and taxed as income. Why not create your own stock dividends taxed at 20%. I now refer to the Dow 4 as one example of how to take income from just four Dow Jones Industrial stocks while not eroding your principle. True, cash dividends they pay will be taxed as ordinary income, but the long-term growth is another matter entirely. Look at the Foolish Four in the 13 Steps to Investing Foolishly.Stocks know more than you do. When you read something that affects one of your investments, unless it is surprise news, it has already been discounted. This is why you may have noticed that stocks generally go up on bad news and they go down on good news. Strange Huh? Think of it this way. Corporate employees know those issues affecting their company and, sure enough, this gets out to those close to the situation. Traders and people in the know may take positions in advance of news being made public and then trade in or out when the public is informed. There are many people who trade on publicly announced news and they absorb much of the selling or buying pressure from the folks in the know.Adhering to the Motley Fool 7 Step Criteria will keep you above the fray and gives you the confidence to hold to your course.
Pirogue,Thanks for the valuable information.I am a new investor, and have already made a new investor mistake: I recently took a loss in one of my mutual funds (Longleaf Partners), because after little more than a year(!!!) I got too worried that it was not going to turn around. (I lost faith that the fund managers - who are supposed to be some of the best in the industry - knew what they were doing). I got out three days ago - JUST before the Dow started its big climb upward. I had spent weeks agonizing about whether or not to hold on, and weakened just when I should have stayed strong. I let "experts" (who had been preaching that "value" stocks were part of the old economy) overrule my common sense.Now I am kicking myself, because - like you - I believe strongly in buy and hold investing (and know in my heart how returns average out over time.)Well, a lesson learned. The next mistake I worry that I've made is that I recently bought Cisco Systems stock (even though the PE ratio is astronomical.) Do you think it's ever justified to ignore this kind of PE? I've been told that I might as well have taken a loaded gun to my head and pulled the trigger...As a new investor, it's easy to let what others say influence decisions. Some of the "old-line" thinkers say "no, it's NEVER justified", while others - one springs to mind that I listened to on Luis Rukeyser's show the other night - say people shouldn't worry about the high cost of technology stocks, they should only worry about not owning them.I just hope I don't lose TOO much money as I blunder my way along...
Sorry to be so long in replying. I suggest not discussing your investments with anyone. It isyour money, your investment ideas and your results. New investors should study the various Fool articles, make conservative decisions with the bulk of your $ and reserve some $ for aggressive growth. Once you have made a decision, sstay with it until YOU have good reason to change your mind!!!
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