In Up Over Your Head

Drowning victim

Microsoft dropped almost 12% in one day.  Google dropped 5% then recovered.  The pessimists probably lost a lot of money and vow never to return to the market.  Others ask, should I buy now?  It’s the classic story of investment told by many who lose money on the stock market.  They try to time the market to make money by quickly buying and selling stocks. This is akin to gambling at the casino by betting black on the roulette table.  It’s luck and you’ll most likely gain or lose a few grey hairs along the way.

What I generally see and witness about investing in equities is what I call the “grocery line chatter” or as some would say the “cocktail party syndrome”.  When the moms and dads or the grandmas and grandpas are piling onto an investment because someone at the Walmart line is boasting how well their investment did. It’s time to bail.  If your friends are pumping their best investment strategies to you in a drunken stupor and everyone around is agreeing to it.  It’s time to bail.  These are the people who invest on emotion.  They’ll take the fast lane on the highway, but end up in a car wreck 100 km up the road.  Invest wisely and you’ll pass them on the slow lane 1 hr later.

So if you bought Microsoft or own it, should you be panicking?  Let’s look at it with some common sense.  Microsoft is one of the world’s biggest companies comprising of almost 2% of the S&P index in the United States.  Year-to-date the stock has risen 17.5% INCLUDING the 12% drop that happened on Friday.  If we took the drop away Microsoft would have been up over 33% for the year.  Ask yourself this question.  For large stable company that has been around for decades to achieve such extreme growth, does it make sense?  One would have to answer with common sense that this kind of growth in the share price is unsustainable.

Given the long term average growth of the S&P has only been around 9%, one can also assume that even the current market with a year-to-date growth of 18.5% is probably unsustainable.  No doubt right now a lot of people are kicking themselves because they didn’t buy into the market at the beginning of the year, but that won’t stop emotional investors from piling more money into the market.  These are the people that might experience a 5% or 10% correction in the market, sell everything and say that the Wall Street thieves stole their money and lined corporate profits.

So what’s the moral of the story?  Stay calm.  Stay positive.  Invest for the long term.  Don’t worry about timing the markets because there are many strategies to use such as Rebalancing or Dollar Cost Averaging.  Don’t go jumping into things that you don’t know anything about.  If you don’t have the time to research companies, understand financial terms and marketplace conditions, then don’t go chasing after home run stocks based on some “get rich quick” scheme.  Stick to index funds that help you diversify your portfolio and let it grow for the long run.  Remember, it’s the average over time that counts, not the short-term gains and losses.

Let the pessimists and gamblers worry about themselves in the open water.  I sure hope they know how to swim.

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