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The
investment world is filled with misleading
“facts” and flashy “materials” that cause investors to lose money. If one
blindly follows what the average investor thinks and does, they are likely to wind up being the “sucker” in the market.
If, on the other hand, an investor
digs a little deeper and attains a unique
insight on the market or “edge”,
then the probability of profitability increases dramatically.
For
Example:
Is
there really a “can’t lose”,
“best” asset class? Is it really “impossible”
to time the market? Let’s
take a look:
According to this chart, on the surface it appears there
is a “best” asset class.
 
On
the surface:
Ø Stocks appear to be a
far better investment
over a very long period
of time.
Why it is misleading:
Ø The timing of
the $100 investment is
the most important factor as it
greatly affects the end result.
You will notice an opposite result
in the chart below.
Ø The distorting effects of inflation
make these assets harder to analyze.
Ø The extremely long timeframe is not realistic for most investors.
But
according to the above chart, stocks must qualify as
the best “Long Term” investment; right? Wrong. Consider the following longer term chart.
Example 2:
On
the surface:
Ø Gold appears to be a far better investment.
Why it is misleading:
Ø The timing of
the $100 investment is
the most important factor as it
greatly affects the end result.
Note the opposite result from
the first chart.
Ø The distorting effects of inflation
make these assets harder to analyze.
Ø The extremely long timeframe is not realistic for most investors.
We can see from the above chart that
over an even longer period
of time Gold appears to be
a better investment, but this too is misleading.
Most people don’t have a 46 year investment time horizon,
and sitting through a twenty year bear
market from 1980 to 2000 would be very
costly.
What did we learn from
the above examples?
Less Important: Which
is a better investment long term?
Most
Important: TIMING
What happens
if you don’t have
46 years to invest? Does it make
sense to invest mainly in a long term bull market or should you simply invest
in your “favorite” investment?
In
the following examples we will remove
the effects of “inflation” by creating a “ratio” out of our
$100 gold investment and $100 stocks investment made in 1966. This way we can
clearly see which asset is
over or under performing simply from the line on the chart moving up or down.
As
we can see in the chart above, if you invested in the 1970’s, the clear
long term trend was in
Gold. When the yellow
line heads up Gold is clearly outperforming stocks. We can see
that big picture market timing is the key to success here.
In
this chart we can clearly
see that the long term trend is in stocks. As the
yellow line heads down
stocks is out performing
gold. During this 20 year trend investors fell in love with stocks as a
“favorite” asset class. Big picture market
timing is once again the
key to success here.
In
the above chart we can clearly
see that gold has been outperforming stocks. Once again
recognizing the big picture, long term trend is the key.
We just demonstrated that timing a bull
market is likely much more important to success than which asset class an investor thinks is the best long term investment. Unfortunately most investors have been lead
to believe that it is “impossible”
to time these “mega
moves” and therefore it
should not even be attempted.
If
investors are aware that they can
identify and time long term
trends then:
Ø The playing field with those in the
“know” will be
a little more even. The average investor will be more of a “player” in the investment
game.
Ø The average investor may better understand
“cycles” and the affects of “inflation” on their investments. This understanding may not benefit some entities such as governments, banks and other large institutions, but it
would probably benefit the individual investor.
But
can an investor
“time” the market? Will investors be doomed to suffer magnificent losses if they attempt to
“time” the market? How can an investor locate a “long term
trend”? What if the
long term trend has already
started? How can an investor identify when a trend may be nearing an end? At www.investmentscore.com
we strongly believe in the power of timing the long term trends. To address the above questions we will release a follow up
article through our free
newsletter service. You can subscribe
to our free newsletter to catch our
updates at www.investmentscore.com.
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