A Few Comments About the Market

This post is going to be two things: short and kind of random.

I don’t know how we ended up talking about this, but yesterday one of the staff physicians at work basically told me to be scared of the market. His theory, supposedly verified by the recent market drop, was that we shouldn’t be invested in stocks because, as the “little guy,” we just don’t have the knowledge, resources, or speed to compete.

His thesis was essentially what Michael Lewis wrote about in the book ‘Flash Boys: A Wall Street Revolt’: High-frequency trading means that there is no way for the average investor (who doesn’t invest as a business) to compete.

I tried to tell him that as a long-term investor, these market fluctuations don’t matter. In fact, they even create good buying opportunities to pick up stocks on sale. He wasn’t buying it.

I’m wondering if this is because he sold some of his positions at inopportune times, effectively locking in a loss. Maybe he sold in 2008 and again after the recent >1000 point drop in the Dow? Who knows.

This attitude reminds me of an article I read recently in the August 25th edition of the Wall Street Journal, “Investors Scramble as Stocks Swing.” The article starts off by saying that people rushed to sell and advisers urged them to stand their ground. This is great advice. The article then tells us about a Ms. Elizabeth who tried in vain to sell some shares in her brokerage account but was unable to log in due to technical problems from the high activity.

By the time she was able to access the site, she was down $6000. From the article: “It might not be a lot of money to some people, but as a young artist trying to get somewhere, this hurt a lot,” said Ms. Elizabeth.

If that $6000 was money that she needed in the short term, or the next 3-5 years, then it should not have been in stocks in the first place. By selling she realized that loss. Had she just held the stocks and reinvested the dividends, the loss would only be on paper.

Yes, there are times when stops of around 35% would be helpful to prevent huge losses on certain stocks. To recover from a 50% drop, you don’t need a 50% gain to get back to even, you need a 100% gain. However, average investors have significantly underperformed the market and much of that is due to emotional selling like what happened recently with Ms. Elizabeth. It also likely the reason why the physician at work distrusts the stock market.

2 Responses

  1. DivGuy says:

    Wow! These “strategies” make no sense. Another proof that so many people have to be more educated when it comes to finance and investing. Let’s see this as more opportunities for us! 😉

    Cheers,

    Mike
    DivGuy recently posted…Dividend Reads for the WeekendMy Profile

    • scott says:

      Hey Mike,

      It definitely creates more opportunities for the rest of us. It is strange how someone can be so educated and yet clueless when it comes to finances.

      Take care,

      Scott

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