Investing With Clarity™ Blog

The Investment Gambler

January 31, 2012 8:48:00 AM

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Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble...to give way to hope, fear and greed.

-- Benjamin Graham

I often hear the opinion that the stock market is nothing more than a gamble, or a crap shoot.

Of course, if you look at the average investor, I can understand why they would feel this way.

Why do investors believe the stock market is a gamble?

It's simple - Because many investors lack clarity in the investments they own and why - Investment Clarity.

Why do investors look so short-term?

There are several reasons why. For starters, when investors lack investment clarity, they become more emotional and risk making poor decisions with their investments as opposed to sticking to a plan.

Additionally, many investors view performance over short-term periods. This is no more evident than information I read recently from Morningstar (the popular provider of independent research to investors).

According to Morningstar, the average equity mutual fund has an annual turnover of nearly 100% (although the median was 67%).

This suggests that every stock in a portfolio is sold over the course of a year! Morningstar goes on to state most manager bonuses are based on three years or less of performance.

So much for the idea of, long term investing!

By the way, if you don't know what you own or why you own it, how can you be in a position to make any decision?

Ironically, as the famous Professor of Finance from Wharton, Jeremy Siegel has argued, the riskiness of owning stocks actually decreases as an investor's holding period lengthens, as volatility smooths out over time.

Of course, because most investors have a tendency to look short-term (including many mutual fund managers) I believe this creates the never-ending OPPORTUNITY to Strategic Cost Average into good long-term investments.

According to a study done by the Leuthold Group, net inflows of capital into U.S. focused equity mutual funds since 1970 have occurred at a median S&P 500 normalized P/E of 19.6x earnings while net redemptions have occurred in months with a median P/E of 15.7x earnings.

In other words, the study shows that retail investors bought high and sold low.

As I have stated many times, volatility is our friend. That is good, because it is here to stay.

Remember, true investing is the continual process of Strategic Cost Averaging&trade\; into businesses we want to own. It is not the process of rading', or trying to find the next hot stock and make a quick buck.

Be an investor, not a gambler and Invest with Clarity.

 


Mark Pearson

Mark Pearson

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