Monday, June 23, 2014

Sometimes your best investments are the ones you don't make.

When the market is not healthy, you should not be invested, period.  For me, this was one of the hardest concepts to grasp in my early years.  In fact, as you will see with our trades in the appendix, using the strategy in this book, you will be out of the market almost 40% of the time.  Since 1973, this strategy has been in the market 62% of the time.

Below is an excerpt from my book, Buy and Hope '... how I beat the Pro's and doubled the Nasdaq spending only 1 minute a week and you can too'.  Check it out at Amazon, here

Huh???  How can you more than double the return of the market while not being invested in it 40% of the time?  As I'm sure you know, the market moves in waves.  It doesn’t just go up, but goes up and down over cycles of time.  In fact, Wall Street has coined the 2000’s decade as “the Lost Decade”, because it started and ended at the exact same price point … resulting in a total gain over 10 years of 0%, but if you had been invested in a Buy and Hold strategy for just 1999 (one year only), you would have returned over 80%.  Obviously there seems to be no rhyme or reason to the cycles that occur, but clearly there are opportune times to be in the market vs. not.

As you will see in the next section, our strategy will get you in the market when it is ripe for rising, and get you out of the market when it appears to be ready to decline.  I realize entering and exiting the market and more importantly staying out for extended periods of time seems like a strange concept … isn't the point of investing to profit?  And how can I profit if I'm not invested?  Very good questions, that deserve equally good answers.

When I was in college, I had a roommate that had a knack for gambling.  He played 21, and spent most of his weeknights playing cards, practicing so that on the weekend he could drive out to Las Vegas and hopefully turn the odds in his favor.  He was a card counter and although the odds are clearly against you in Las Vegas, I decided to go along for the ride a few times to watch and partake as well.

The Las Vegas experience is very surreal for a young person.  I was only 19 when I made my first trip with my roommate, and learned so much from him.  As you know with card counting, the goal is to count the high cards and low cards so that you know when there is a greater probability that a specific card will be turned over next.  The goal is to ultimately bet at opportune times, when you have an increased chance of winning.  Las Vegas games are skewed so that the odds are against you.  Obviously if they were skewed in your favor, the casinos would quickly go out of business.  Most people that go to Las Vegas don’t want to look at these games as mathematical equations and probability based, but they clearly are, and you can increase your odds by betting at the right moments.  Obviously the goal in card counting is to watch the cards and if you need a high numbered card and you know that a lot of low numbers have recently been played, you can increase your bet … knowing that the odds are more in your favor.

When we got to Las Vegas, we immediately went to the floor of one of the casinos and my roommate picked a table and just sat and watched the table for about 15 minutes.  I finally asked if we were going to play, and he pretty much ignored my question, but eventually he hopped in and played a number of winning hands.  Then suddenly, he said he was done for awhile.  Over that weekend, the pattern continued, we actually spent more time watching than playing.  Eventually I asked him what he was doing, and he explained the obvious … there are times when the opportunity is there to make money and that’s when I play, and there are times when the odds are not in my favor, and the only safe place to be is not playing. 

“You’ve got to know when to hold them, know when to fold them, know when to walk away, know when to run”  Kenny Rogers, The Gambler

This concept was obvious to me when I sat and thought about it, but it was still really hard to sit there and not play the game. 

Investing in the market is a business, and should be treated as such.  You are up against some of the greatest financial minds (and computers) in the world, and If you are not going to play the game right, you might as well cash your entire retirement account and take it to Vegas … because the odds are clearly against you.

There are times when the market is healthy and you should be invested, and times when it is not and you shouldn't even try to play the game.  From mid 1999 until December 2001, the Resnn strategy stayed completely out of the market the entire time.  For almost 2 ½ years, we sat in cash … that’s A LONG time!  But, what was the alternative.  In 2000 the Nasdaq returned -39.3%, in 2001 the Nasdaq lost again … another 21.1%.  Buy and Hold Hope for those 2 years, resulted in a net loss of over half of your portfolio (52%). 

"Sometimes your best investments are the ones you don't make." - Donald Trump.
Much as my friend taught me about Las Vegas, the same rules apply to Wall Street.  When the market is not healthy, it is ok to NOT take part in it.  In fact, you MUST not take part, it is critical to your long term success. 

When the odds are not in your favor, don’t even try to play the game … you will lose.

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