Curried Wealth Building
Finding an Edge

If you want help with your finances, give me a call at 703-791-3243.
February 15, 2009
Issue 33  -  The Myth of Buy and Hold

Wall Street is a business. Businesses exist to make a profit. Profits come from paying customers. Customers receive a benefit for monies paid…..except on Wall Street.

Wall Street is a marketing MACHINE. The Journal of Consumer Affairs reports that the mutual fund industry alone, spends over ½ a trillion dollars a year trying to entice investors (customers) to place money into their care. This is done with slick magazine ads and television commercials. These typically show outstanding results over the last 5 or 10 years. These ads are typically misleading for a couple reasons.

First, the mutual fund company publishing the ad has dozens, maybe a hundred mutual funds to choose from. Which fund do you think they are going to use? Perhaps the best performing one? Absolutely. You won’t hear about the mutual funds at this firm that were merged or even abandoned. Secondly, they also have great flexibility in choosing the PERIOD of performance. I can take the past 5 years performance of an investment and make it’s performance look much better just by cherry picking the start and end times for the measured performance.

Next time you see a performance ad notice that the period of performance will start and end mid-year. It almost never starts on January 1. This allows them to make the returns seem larger.

Wall Street does NOT make money when the stock market goes up. They make money no matter what. Market up, they make money, market down, they make money. This is because they make money from FEEs, not directional movements of the market. Their biggest fear is that you take your money out and put it somewhere else. This is why they promote buy and hold. If you were to sell at times when the market looked a little giddy and too high, then you might just go ahead and withdraw it from the account. Can’t have that, can we?

Think of the stock market as roller coaster. There are long cycles where you are going up the hill (the bull) followed by long cycles where the train goes down the hill (the bear). The following chart shows the major cycles over the last 100 or so years for the S&P 500. 

 
 
Although this chart stops at 2003 it is clear that a buy and hold strategy is just plain stupid. These cycles last on average 15 years. The current bear cycle is only 9 years old and therefore will probably run to at least 2012-13. The down periods all showed returns that were less than just investing in government treasury bills.
 
Let’s look at the last ten years:
 
 
 
 

Wow, that’s fantastic long term investing. My "buy and hold" pot is down after ten years. I thought stocks were a sure thing? NOTHING is a sure thing and you can darn well guarantee that doing the same thing as everybody else will NEVER make you wealthy. Mathematics won’t allow it. So the next time you hear someone talk about buying for the long term, you can be sure he gets his bread buttered by taking a little bit off the top of your account every year.

There’s an old story, which I’ve seen many places on the net and there is even a book with the punch line as a title, it makes my point beautifully:
 
 
"In 1885, William R. Travers, prominent New York businessman and builder of Saratoga Race Track, was taken out for lunch by a Wall Street broker anxious to impress him and win his business. The broker took Travers to a nearby marina to show off his yacht and those of the other brokers who worked for his firm. The businessman looked down the line of beautiful craft and asked, "Where are the clients' yachts?" There was no answer."

Brokers don’t care if you make money. They never have and they never will. It’s all about the fees. YOU, are the only one that cares if YOU make money. Take responsibility and learn what’s going on with your finances. That is the only chance you have to do well in the long run.

Some Comments about the Just Passed Bill

My, my, my, how fast can you spend nearly a trillion dollars? This rushed monstrosity, which is no better than the first TARP passed under Bush, and may even be worse, is going to do nothing but take us further into debt. The patriotic name slapped on this mess, the American Recovery and Reinvestment Act, can’t conceal the truth. This is nothing more than a giant spending bill. Less than 25% of this bill is stimulus related and we had to rush it through a mere 12 hours after it was finished so that no one could dig too deeply into the details.

If you noticed the congressmen holding the bill (it took two hands) you saw that it looked like it was in pieces. This is because it was written by numerous groups of staffers in different locations. The assembled bill was a hodgepodge of pork, tax cuts and Wall Street restrictions thrown together at midnight.

My question is this: If TARP #1 didn’t work then why are we doing TARP #2? How about this little tidbit about TARP #1 from GATA:

"Neither J.P. Morgan, Goldman Sachs or any other bank will return the TARP monies because the actual values of the Preferred Stock and Warrant packages were 50% lower than what the taxpayers were forced to pay. And the actual values of those packages have dropped considerably in every case since the welfare payments to Goldman, Morgan , Bank of America etc. were made.

In the case of Bank of America and Merrill, the warrants purchased by the Treasury are down over 88% since the bail- out."

Wow, imagine that, the U.S. tax payer got screwed by Wall Street. That’s never happened before. Right. Let’s just take a quick look at what is being foisted on us. This idea came from a guy on CNBC. Everyone is running around saying we need to get the banks lending again, right? So the plan is this: Borrow money from OUR future tax revenues and then give it to the bankers who will in turn lend it back to us! Why in the hell do we need the middle man? This, as I’ve said before is a "save the bankers" bill and nothing else. The other pork is just being thrown in there because they can get away with it. What’s a few more billion on the ole Uncle Sam credit card right?  The real reason the American economy is in trouble is an overwhelming amount of debt. Look at this chart from the contraryinvestor.com:

 
The American people are drowning in debt. Their debt has been growing as a percent of net worth for over sixty years! Well guess what? I believe that is about to change as we are FINALLY starting to save and pay down debt. This will be a long process. Another chart from contrary investor:
 

Notice the downtrend in savings rate has been broken and we are starting to save. This is LONG overdue. This will result in a lowering of debt as time progresses. Of course this will lead us into a deep recession/depression, but it MUST occur to right our ship and move forward.

I did make one stock move this past week as I sold some of my SSRI,, which was purchased at about $12.85 late last year for about $20.60. The proceeds were used to purchase more of my largest holding, GORO at about $4.67. I still like SSRI and hold a significant position in it. I just believe the GORO will outperform it over the next two years. In fact I think it could reach $20 fairly easily if they do indeed start paying a dividend as they are currently promising.  Next week I will be writing up a short article on GORO and why I am so heavily invested in it.  Have a great week.