The Market for Fun, Not Profit

Posted: Jan 05, 2013 12:01 AM

As we start the New Year, the same news articles as last year dominate the investment landscape

“Buy-and-hold is dead; trading is where it’s at.” 

“The market has made little progress since 1999.” 

In addition, we’re currently seeing similar headlines from last year that tout the opposite investment strategy, “Trading is the path to ruin, buy-and-hold is where it’s at” and “We get in too soon, we get out too late.” 

Once again, the retail public, which- after analyzing the fact that mutual fund withdrawals were a lot less than a year ago- is totally confounded with two different approaches to the stock market. 

The problem is that both investment strategies are absolutely right and both investment strategies are equally wrong, if you continue to believe the stock market is an investment.  Over the past year, the financial markets have experienced “flash crashes,” IPO collapses, and even “fiscal cliffs.” 

As the basis for a theoretical investment, keep in mind that any of these conundrums can quickly undo whichever investment strategy is utilized.  Trading on a daily basis can result in short-stopping significant losses; it can be worthwhile if no extraneous event disrupts the technical analysis. 

After all, don’t the investment guides say to buy when both the 200-day and 50-day moving averages are rising?  If this is what you call investing, spending 6 ½ hours per day in front of a computer monitor for the rest of your life, trading should suit you to a tee. 

However, after your first significant failure, you’ll more than likely turn to the buy-and-hold side.  For those who refer to the buy-and-hold approach as “investing,” the benefit is the freedom to have a life beyond the daily trading ritual of staring at a digital screen. 

Yet, the difficulty of buy-and-hold is not only in the “buy,” but also in the “hold.” 

Just consider that over the past decade, the stock market roller coaster has simply brought us back to even, if you had stayed on for the entire ride. 

Most people, however, buy at the top after excessive optimism prevails and give up the “hold” after thousands of points of decline as pessimism dominates the day. 

It is the rare bird who truly buys-and-holds through the complete cycle. 

Since nobody really makes money in either strategy, primarily due to being dominated by both fear and greed, it’s definitely time to dismiss the stock market as an investment. 

Therefore, when we lose, as we most assuredly will, whether it’s trading or buying-and-holding, we must embrace the same attitude as we do at the casino, the racetrack, the bingo parlor, or even while playing the lottery, “Oh well, at least I had some fun.”