Drama. The simplest investment strategy that we know is to just buy and hold stocks, any stocks although some are better than others in a simple way that we’ll talk about below but almost no one agrees with that “investment strategy”.
Mom and pop might say that we should buy a house, an expensive one, and put the rest of our money (if we have any) into “safe” government securities and Uncle Harry will say that we should buy even more properties and rent them out until their prices increase (by levitation) and the investment advisers will tell us to buy mutual funds and exchange traded funds (ETFs) or do something complicated (that only they “understand”) between equities and bonds and income funds as we get older but they won’t talk to us for long unless we already have half a million or so and we won’t get it by dealing with them.
And our teachers said nothing at all at an early age when we might have learned something about money – we guess that they assumed that we would never have any – and that’s why there are so many Americans who are still in the middle-class and downwardly mobile and the consumption rate in the US is second only to the United Kingdom (65% and 70% of the GDP, respectively) and the savings rate (16% of the GDP) is comparable to South Africa and Turkey and less than Brazil; please see our Post “(P&I) Our G20 Weekend and the Rush to India” for more details.
On the other hand, if we just buy and hold stocks – almost any stocks – and don’t read the newspapers or watch the daily ticker tape, it’s a one-time purchase and a one-time sale and in the meantime the companies whose stocks we own are working for us and most of them will do a really good job because they’re in the business of making money and we won’t have to fix the roof, wash the windows, or chase tenants for our rent.
For example, we could have bought 100 shares in each of the six “most popular” companies of the last three years for $83,000 in July 2012 (reserving $10,000 for Alibaba which only became available later) and having done nothing else for the last three years and being not at all clever or knowing anything about the stock market, we can sell them all today for $171,000 and we’ve also had some dividend income from Apple Incorporated and Alibaba; please see the illustration on the right (and click on it and again to make it larger as required).
What’s disturbing in all of this and the reason that we’re having such a bad day is that we cannot find a reason to own these stocks (and there are others like them in the daily IPOs) and the question becomes “Should we buy stocks for no reason except that lots of other investors are buying them because they’re “excited” about them?”
And if we know that that’s the only reason, what should we do about it? What should we do about everybody getting rich but us? Vote for the Democrats?
The Quantum Mechanics of Buy and Hold
As we noted above, there’s no reason for us to be “excited” about these stocks except that the market is excited by them for whatever reason and there are as many reasons for a stock price as there are investors and their money (The Tao of Stock Prices) and it is they who command the stock prices which could be anything if the demand for them did not exceed their supply and the price is not zero or much too low because if it were, somebody would try to buy them up and have access to all of their earnings and not just the dividends which are paid by only some of them.
As a result, these investors can only make money from each other and they do it by being first-in at a lower price and first-out at a higher price (they want to be FIFOs) and we can avoid that battle by coming and going as we please and not paying any attention to the news, rumors, or ticker-tape and if everybody did that (and they do in some markets), then the price of a stock would be its “fair value” and the price of an income and stocks that didn’t pay dividends would remain the property of the owners and the “investment industry” would shrink to about 1/10th of its size and be largely the business of the investment banks and the brokers as it was 100 years ago.
For example, Berkshire Hathaway has never paid a dividend and does not distribute its income and investors buy the stock because it’s for sale and other investors are buying it too and they want to be first-in and first-out and Mr. Buffett has said that his greatest mistake in investing was to charter Berkshire Hathaway as a public company and not a closely-held private one.
To do better than buy and hold or gambling (FIFO) is not hard and all that we need to do is focus on what we want – we want 100% capital safety (no matter what the glamour) and we want a hopeful but not necessarily guaranteed return above the rate of inflation – and what that amounts to is that because our money is not good enough as money (we don’t have enough of it and it never is in any case), we want to buy an income (and that’s what an “investment” is, Ms. Jones, and you should have told us that while we were still in school and as an alternative to just beating our books, so to speak) and that is what we’ve been trying to do (and are required to do) ever since we got out of school and our short pants; please see Exhibit 1 below (and click on it and again to make it larger as required).
Exhibit 1: The Quantum Mechanics of Buy & Hold
For more information and examples on the Free Market Yield and the terms that we have used above, please see our Posts “(P&I) The Dismal Equation (Ecclesiastes 9:1)” and “(B)(N) S&P 100 Volatility Risk and The Full Moon” and “(B)(N) NASDAQ 100 Volatility and The Stone Bunnies“ and for an introduction to The Barometer “(B)(N) What’s A Girl To Do” or “(P&I) The Swiss Franc Debacle“.
And for more information on real “risk management” in modern times and additional references to the theory and how to read the charts and tables, please see our Post, The RiskWerk Company Glossary and “(P&I) Dividend Risk and Dividend Yield“, and our recent Posts “(P&I) The Profit Box” and “(P&I) The Process – In The Beginning“; and we’ve also profiled hundreds of companies in these Posts and the Search Box (upper right) might help you to find what you’re looking for, such as “(B)(N) TLM Talisman Energy Incorporated” or “(B)(N) ATHN AthenaHealth Incorporated” or “(B)(N) PETM PetSmart Incorporated“, to name just a few.
And for more applications of these concepts please see our Posts which rely on the Theory of the Firm developed by the author (Goetze 2006) which calibrates The Process to the units of the balance sheet and demonstrates the price of risk as the solution to a Nash Equilibrium between “risk-seeking” and “risk-averse” investors within the demonstrated societal norms of risk aversion and bargaining practice. And for more on The Process, please see our Posts The Food Chain and The Process End-Of-Process.
And for more on what risk averse investing has done for us this year, please see our recent Posts on “(P&I) The Easy (EC) Theory of the Capital Markets” or “(B)(N) The Easy (EC) Theory of the S&P 500“, and the past, The S&P TSX “Hangdog” Market or The Wall Street Put or specialty markets such as The Dow Transports & Utilities or (B)(N) The Woods Are Burning, or for the real class action, La Dolce Vita – Let’s Do Prada! and It’s For You, Dear on the smartphone business.
And for more stocks at high prices, The World’s Most Talked About Stocks or Earnings Don’t Matter – NASDAQ 100. And for more on what’s Working in America, Big Oil, Shopping in America or Banking in America, to name just a few.
We are The RiskWerk Company and care not a jot for mutual funds, hedge funds, “alternative investments”, the “risk/reward equation” and every other unprovable artifact of investment lore. We have just one product
The Perpetual Bond™
Alpha-smart with 100% Capital Safety and 100% Liquidity
With No Fees and No Loads on Capital
For more information on RiskWerk, please follow the Tags or Categories attached to this Letter or simply enter Search for additional references to any term that we have used. Related data may be obtained from us for free in a machine readable format by request to RiskWerk@gmail.com.
Investing in the bond and stock markets has become a highly regulated and litigious industry but despite that, there remains only one effective rule and that is caveat emptor or “buyer beware”. Nothing that we say should be construed by any person as advice or a recommendation to buy, sell, hold or avoid the common stock or bonds of any public company at any time for any purpose. That is the law and we fully support and respect that law and regulation in every jurisdiction without exception and without qualification to the best of our knowledge and ability. We can only tell you what we do and why we do it or have done it and we know nothing at all about the future or the future of stock prices of any company nor why they are what they are now. The author retains all copyrights to his works in this blog and on this website. The Perpetual Bond®™ is a registered trademark and patented technology of The RiskWerk Company and RiskWerk Limited (“Company”) . The Canada Pension Bond®™ and The Medina Bond®™ are registered trademarks or trademarks of the Company as are the words and phrases “Alpha-smart”, “100% Capital Safety”, “100% Liquidity”, ”price of risk”, “risk price”, and the symbols “(B)”, “(N)” and N*.