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davejh23 (< 20)

Second Largest Dow Week Ever!



December 02, 2011 – Comments (6)

This morning, with the Dow up 100+, I read multiple artices noting that the Dow was on track for it's second highest weekly points gain in history.  Even though the Dow slid throughout the day and closed flat, at the close there were more articles noting that the Dow did indeed have it's second highest weekly points gain ever.  The articles note that the largest point gain was in the Fall of 2008, and while most are probably aware, they fail to mention that this was in the middle of a huge stock market crash....the market continued to rally for a few days following that last week of October, and then fell 2,000+ points in the following two weeks...-3,000+ over the following 4 months.  Massive weekly gains driven by hope are not at all encouraging.

6 Comments – Post Your Own

#1) On December 03, 2011 at 11:46 AM, amassafortune (29.19) wrote:

Kirkydu had a nice anectdote Shake! Shake! Shake! describing how the average investor is encouraged to top-tick their market buys and then be shaken out by fear near the bottom.

"Buy low, sell high" is great if you have the psychological make-up to nearly-always invest against the crowd. 75% of investment managers do not, which is why they underperform. We humans like to travel in packs. That was a good innate quality to have when the species was trying to domesticate similarly-minded dogs thousands of years ago. For modern investing, it's not such a desirable trait. 

For a related contrarian piece, here's one on Nassim Taleb at It's long, but one of the best researched and written articles I've seen lately. Taleb buys mostly out-of-the-money (cheap) options on unlikely events. His payoffs are rare but huge. As a result of the strategy, the portfolio loses money on most days. As the article states, some losing periods go for so long that even Taleb has a difficult time controlling the psychological element of the trading plan.

Thanks for the great point. The market has been on a downtrend since S&P 1370 in May. Until we break about 1320, that trend remains intact. 


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#2) On December 03, 2011 at 12:55 PM, dwot (28.99) wrote:

amassafortune, it has been about 4 years since my exit from the market.  I got out at the top and I simply haven't had time to spend on the market as I did prior to moving to my job in the north.  I moved money to start trading again, but I've simply been too busy to look around.  But, when I think back, my goodness I had nerves of steel when I was in the market and I was frequently against the market and it worked very well for me.

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#3) On December 03, 2011 at 2:01 PM, amassafortune (29.19) wrote:

dwot, cash was a good place to be for the past four years. This year, too with heavy volatility, yet just about even on the year. You certainly paid fewer commissions than I did. 

I still favor the downside, but with China, Europe, Australia (at least real estate), Brazil, and others slowing, the relative stability of the U.S. markets could generate net investment inflows, despite corporate profits topping earlier this year.

Speaking of contrarian moves, now might be a good time to exit some toppy Canadian real estate markets, except you need to live somewhere. Someone posted a fixer-upper going for $1 million+ in Vancouver, I think. Steve Keen's predicted Australian RE collapse appears to be in progress.

Kyle Bass has a significant bet against Japanese paper, betting they can't beat the impending demographics and debt level. Part of successful contrarian moves seems to be holding at a loss for long periods. Mr. Bass has had his position for many months and expects his payday could still be years away. As with gold, if one just buys at 5 or 10-yr lows, or sells at 5 and 10-yr highs, you'll do better-than-average.

This is also why fund managers without autonomy can't beat the market long-term. If you have a boss, you can't be wrong for long. Imagine a state pension manager being heavily in gold since 2005. They would have been removed by 2008 and the position liquidated, removing one of the few chances for the pension fund to remain fully-funded today.  

So what's low now and has intrinsic value that will survive possible currency devaluations, or overprinting erosion? Natural gas, U.S. real estate, Beanie Babies? Beanie Babies?... that's one to laugh and scoff at, but isn't that the point? Look at areas where almost everyone thinks there is zero chance of value appreciation. Do some good due diligence, and know, the lower you buy, the more the crowd is against you, and the longer it will take for the crowd groupthink to shift before they bid up the investment.  

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#4) On December 03, 2011 at 2:44 PM, portefeuille (98.92) wrote:

the average investor is encouraged to top-tick their market buys and then be shaken out by fear near the bottom

One of those "legends". If only "investing" were that easy. You could simply "do the opposite"  of what "the average investor" does ...

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#5) On December 03, 2011 at 2:48 PM, portefeuille (98.92) wrote:

#4 mutual fund investors do "on average" slightly worse than the funds they invest in, though. so as usual the legend is not completey "made up" ...

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#6) On December 03, 2011 at 4:17 PM, amassafortune (29.19) wrote:

port, I used to have the type of portfolio you still believe in. The companies had strong balance sheets, good growth prospects, and many had paid increasing dividends for many decades. Using my Birinyi ruler, dividends were on track to replace my income at a faster rate than my youth was being consumed. This was a good feeling, but a little too complacent.

I bought dips, dividends were reinvested, and I diversified among industries, except for overweighting higher-growth areas like biotech and technology. 

I thought I was an excellent investor, but as it turned out, was probably just lucky starting soon after Volcker fixed the last deep recession. I rode the entire wave up to 2008, adding all the time, especially during periods like the crash of 1987. A couple long-term holdings extended beyond ten-baggers.  

The keys for me today are:

I think we did complete a major move and the S&P 1,560 top will hold for several more years.

I was buy-and-hold when banks were leveraged 10:1, kept the mortgages they sold in their own accounts, and the value of everything was not releveraged in an unregulated dirivatives market.

High frequency trading could not drop the market as it can today. Stops were a protective mechanism, not inside information used to alter the balance of buyers and sellers. 

I was buy-and-hold just before Reagan began to lower taxes, there was talk of placing the Social Security surplus in a lockbox, and state/federal/city workers traded low pay for modest long-term benefits that were easily covered by current tax receipts at the time.

Entities that protected me as an investor, like the SEC, FASB/GAAP, and the FDIC, were slovent, unwavering in their missions, and committed to the spirit of their raison d'etre. 

For my children, and young investors, I believe the portefeuille approach is valid, especially for the one in biotech. My advice to them is to buy quality companies and if the market goes down, buy more.

I'm sure my children will have ten-baggers by 2050. For me, in this historical financial period, time in cash exposes me only to currency risk.I don't have until 2050 to invest like I used to. I am more of a trader now. 

I agree that buying low is more difficult than simply doing the opposite, but if oil slips to $35-$50 per barrel as it did in early 2009, that's a buy for me. If GM slips to its 2009 low, that's not a buy for me because the intrinsic value would still be in question. The S&P at a 52-week low, buy a little. The S&P touching 1,320 this month, sell a little. 

My days of always being long and strong are gone, even though that strategy served me very well for many years. 

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