This past week with family and friends reminded me of the short term nature of people in general. Some comments overheard that should be discussed in detail:
1. “Don’t invest in the stock market, it’s not acting well recently.”
It’s never a good time to invest in the market. A rational investor with imperfect knowledge will have to act to the best of his or her abilities. Since we can’t accurately predict the future, we can only invest in situations where there is a margin of safety just in case the future really is as bad as everyone thinks. This is called buying a dollar with 50 cents.
Volatile markets create great uncertainty. Volatile markets also create great opportunities. The best deals are found when there are limited buyers (less competiton always leads to higher profits).
2. “Technical Analysis works in theory but I haven’t made money from it because I don’t have the time to trade.”
Technical Analysis may or may not work. Every technical analyst I’ve met has not be able to consistently make money in all market environments. I also don’t know famous market technicans, except for people who write about TA books, or sell TA systems.
Does it work? My friend claims yes but doesn’t know anyone who has made money from it, theoretically someone out there is implementing it correctly.
3. “Stocks are too risky, buy CDs”.
Yes, stocks have more risk than CDs (certificate of deposit). CDs also have negative returns after factoring in for inflation. The reason why we invest in stocks is to maintain purchasing power for the future. Inflation and taxes are the enemy here. Any interest recieved from the bank will be taxed. A stock investment is ideal since you can theoretically hold it for a lifetime if you wish, gains will be taxed when you sell. Also long term gains and dividends are taxed at a lower tax rate than interest from CDs.
You know when you are getting old when people tell you to have a happy and “healthy” new year. I hope everyone has a low vol, positive alpha new year.
