There is a popular party game known in the UK as “Chinese Whispers”, and in the US as “Telephone”. A group of people sits in a circle, and a message is whispered to the person at one end of the chain and is relayed from person to person. A simple phrase such as “I gave my brother a ride to work” can be, at the end of the circle, as “I saw my mother ride a stork”.
While the idea of short-term “trading” versus long-term “investing” cannot be attributed to a single person, book or even a sentence, the concept probably passed around the Chinese whispers circle once or twice.
The current conventional wisdom on the stock market is that if you hold long enough, you will always make a profit. Therefore, there is no need to “trade” the market. Discussing the validity of the different strategies to use to implement this concept is like talking religion. In the biblical book of Mathew, it says, speaking of Jesus: “Is not this the carpenter’s son? Is not his mother called Mary, and his brethren James, and Joseph, and Simon, and Jude?”
For nearly two thousand years, scholars have been debating these passages, arguing whether those brothers and sisters were biological siblings, step-siblings, “half” siblings or cousins. The debate on “averaging down”, “peso-cost-averaging” and “staged investment” is no less a matter of faith. If it works for you, then it is true and perfect.
But part of the problem of the “Jesus and his brothers” discussion is that none of the people debating the question were there. Part of the stock-market discussion problem is also a lack of historical perspective. Historical data for the Philippine stock market can be hard to find prior to 2000, and more difficult before the formation of the Philippine Stock Exchange (PSE) in 1992.
However, we do have accurate data for crude oil, which moved from $3.56 in January 1973 to $140 in 2008 and now is trading at about $50. Certainly, you would have made a substantial profit buying and holding from 1973, averaging down, and cost-averaging. But those would not have been the optimum profit strategies. When the PSE Composite Index (PSEi) first reached and held the 4,000 area in 2010, I wrote publically several times that the index would reach 8,000 within a decade. That was actually a “no-brainer”, and my prediction was way off to the extent we hit 8,000 in 2015.
The PSEi moved from 420 in January 1987 to 1,300 in July 1987 and back to 500 in 1991. But for 30 years, the local market has been going higher through coup attempts, impeachments, global financial crisis, natural disasters and every other negative event and person you can think of.
Every time we were told “We are now officially in a Bear Market”, it was a buying opportunity. Certainly, selling for profit and then buying back lower makes more profit-sense. Each “correction” and “bear market” was a false move that led to a slingshot higher. The best example is the 2007 fall from 3,800 to the bottom in 2009 at around 1,800, and then to 4,000.
In the words of Martin Armstrong, “What is essential is if we are going to really rocket up in a major phase transition, you MUST always have the false move first. These are just minor swings creating the false move, which is always counter to the ultimate trend”.
The problem of investing is that it requires nerves of steel or maybe better, locking yourself in a cave on Mount Makiling. Trading and taking advantage of the false moves require another discipline—hard work.
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E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.