This article may be a revelation. This article may make some people angry about the past decisions they have made. And some might also also say “That guy doesn’t know what he’s talking about.”
To explain this I’m going to have us look at three things: a Paradigm, a Parable, and a Pair of Powers.
The Paradigm of the Financial Markets.
This might be the most important of the three concepts I will talk about in this article. When we understand this one concept, this one paradigm, this one way of thinking will transform us from being a “consumer” of financial products to a “trader” of the financial markets.
As traders or investors, we are putting our money into an entity known as the “Financial Market.” Whether the vehicle you are using is a company, a commodity, or a currency… a stock, an option, a contract, or a ForEx pair, every single “in and out” represents a transaction between a consumer and a producer or supplier.
Now, why is this global pile of securities collectively called a "market”? Well, like any other market it’s a place where “products” are bought and sold. Just like the smartphone market, the automobile market, the ice cream market, and the farmer’s market, the financial market is EXACTLY the same… only we deal in virtual products that we buy and sell by clicking buttons and moving our mouse instead of having to warehouse our inventory and provide a storefront.
So, IBM , is a *product*; Tesla is a *product*, Oil and Natural Gas are *products*, and the Euro , Yen, and Kiwi are *products*, no different than a Ford Focus, an iPhone, or a pint of Ben & Jerry’s.
Now, in any transaction in any market, who is it that makes money, the consumer or the store owner? You guessed it… the store owner! For *decades* now (going on centuries, actually) we have been conditioned to be *consumers* in a market when it’s the *producers* which are the ones who make the money!
We have to switch our thinking. We need to think like a store owner or retailer rather than a customer.
Now, how is it that any retailer, any store, whether it’s the ice cream man or Amazon.com, makes their money? They find a way to buy products (inventory) at *wholesale* and sell those products to consumers at *retail*.
What do retailers like Amazon and WalMart sell? ANYTHING and EVERYTHING that they can get their hands on where they can buy at wholesale, mark it up, and sell it to the consumer at retail.
So how can we make money in the financial markets? Just like Ben and Jerry do in the Ice Cream market. Just like Ford does in the automotive market. And just like Apple does in the personal computing market.
We need to do as the Amazon do.
The Parable of the Retirement Industry (A Totally True Work of Fiction)
Once upon a time (1975, actually) there was a meeting of all the FatCat bankers. They all were having a grand time sipping their whiskey, smoking their cigars, bragging about their riches and success but they all agreed that they wanted even MORE.
Looking back at the Stock Market they noticed that S&P really hadn’t moved much in the last 20 years. They said to themselves, “You know, all we are doing is trading all this inventory among ourselves and price is just SITTING there… How can we create a DEMAND for our product so we can see it go UP in value?”
In comes New Kid on the Block, John Bogle, founder of Vanguard Securities. “Gentlemen,” he said, “I’ve got a great idea… Let’s give every working man in America a bucket… we’ll call it a Mutual Fund. And we’ll tell them that THEY have to fill it with all kinds of stocks: industrial stocks, medical stocks, automotive stocks, power company stocks, telecom stocks, and the more and more people start ‘saving for their retirement’, the more people will be buying our ‘products’, there will be more and more DEMAND every year and BOOM - the price of our products will skyrocket! (Insert sinister ‘Muwahahaha' laugh here…)
So the word gets out to the street and into the business world: Your employees now have the opportunity to save for their retirement using their own money! (Which took employers off the hook from providing their own pension programs as the 401k industry began to grow.) So year after year, more and more Americans bought into the program, and as demand surged, so did the market. For the next 25 years the S&P would see a bull run like NEVER before!
So what happens for these 25 years is a natural effect of . As the limited “supply” of available stocks is becoming consumed by the American workforce, demand goes up. And it works great…. For 25 years. BUT… what happens when those 20-30-and 40-somethings who are working and buying, working and buying, working and buying, creating all that DEMAND… What happens when they become 40-50-and 60-somethings who begin to retire? They begin SELLING those stocks (creating monthly retirement income) and now we start seeing a REDUCTION in demand and an INCREASE in supply as the “balance of power” shifts and there are now more Sellers than Buyers - and the tide now turns in the epic cosmic struggle that goes on in the financial markets day after day, year after year, minute by minute.
So what happens to these retirees who have lost HALF their savings by the time 2002 rolls along? They have to stop the bleeding! They go back to work so they can (a) have income and (b) put MORE money into The System so they can reclaim the level of retirement income that they need to go back into retirement. So now they are no longer sellers, but they are once again buyers, driving the price of the ‘products’ in their portfolios back up to pre-crash levels as the shifts back into the hands of the buyers.
Five years go by… The people went back to work see that their 401ks are back to pre-crash levels, they quit their jobs, and the cycle starts all over again when there are now more buyers than sellers. Ack!!!!
Now come into the present day where the market is at all time highs. Price has been whipsawing for the last 24 months! What in the blue blazes is going on? The same thing that has been going on since the dawn of retail sales in an open market: products are being SOLD to customers at retail, and BOUGHT from them at wholesale.
The Pair of Powers
So how does this happen? The first power is the power of FEAR and GREED. When we master our fears and temper our greed we can make the RIGHT decisions in the market.
What has the average investor been taught for DECADES? To buy strong, healthy, up trending stocks. “Look at that company… they’ve been up trending for 18 months.” “Look at *that* company… they’ve been showing healthy growth month after month for the last year.” “Don’t miss out… you’ve already let the stock go from 25 to 85… you don’t want to miss the boat, do you?” BUY! BUY! BUY! The Fear of Missing Out (FOMO) and the greed of wanting to “make it rich” lets the novice investor be a slave to the emotions of Fear and Greed. So they buy. And what inevitably happens… You guessed it, the stock starts to falter, starts to fumble, has some bad news come out, is affected by CoronaVirus or other event or excuse. So once the stock gets to a new low price, they get scared (FEAR) and sell back to the broker so they can “cut their losses.”
Economically, what did the ‘customer’ do in this case? They BOUGHT a product at “retail” and they SOLD the product at “wholesale.” Just like they would if they were buying a car. Go to the local auto dealer, buy a new car for $30,000, and later sell it for $10,000 when you trade it in for the next year’s model.
We need to start thinking like the RETAILER, or in this case, like the financial institution SELLING the products at RETAIL and BUYING them at WHOLESALE. Warren Buffett once said that investors need to be “fearful when others are greedy, and greedy when others are fearful.” in a nutshell.
The second power is . Everything on the planet from Beanie Babies to Cabbage Patch dolls to 1970’s-era Star Wars action figures and yes, Financial PRODUCTS in a financial MARKET has its VALUE determined by the simple market forces of .
The Solution: Hiding in Plain Sight
So, all that to say is, Buy and Hold is not only dead (which indeed worked great from 1975 till 2000) but it’s pretty much the great American Lie still being told to this very day every time someone enters the workforce and is encouraged to “put a little away every paycheck toward your future”. The Financial Markets are the ONLY markets in which we are conditioned to pay full retail for a product (look at that uptrend, look at the strong growth!) and sell at wholesale (Well lookie there, you’re losing money… let’s get you out of those losers.) There is NO other market - be it the automotive market, the electronics market, or the farmer’s market - where we are happy to pay full price. I want my stuff on SALE, and that includes my investments!
Still not a believer? Let the money do the talking. Looking at the Chart at the top of this article, (also posted below), if you started investing in 1997, you would have had a ZERO NET RETURN after 12 years. If you started investing in 2000, you would have quickly lost HALF your investment, and broke even for a ZERO NET RETURN after 13 years. “Hey, I was told that time is on my side… I just let a DECADE of my life go by with a ZERO return!” If you were unfortunate to begin investing in 2018, you would have experienced six vicious whipsaws in just 33 months. Who needs that kind of heartburn?!?! And where is the market going to go? Up? Down? Do *you* or your financial planner have a crystal ball? Remember: Every financial planner and investment firm has that oh-so-handy get-out-of-jail-free card: “Past performance is not an indicator of future results.”
Buy and Hold is DEAD, which means that we can’t afford to be INVESTORS, which is as good as throwing your money into a casino. We need to be TRADERS where we can “follow the money” and see where the major financial institutions, the “movers and shakers” of the market, the “market makers” are CREATING those levels of wholesale and retail, of , and BUY when prices are at wholesale and SELL when prices are at retail - the exact OPPOSITE of what we have been taught in the Financial Market but the very SAME thing that we do in Every. Other. Market.
When we learn to be the store *owner*… When we learn to buy at wholesale to sell at retail… when we learn to “follow the money” using a PROVEN system of trading that identifies these levels of wholesale and retail, we will no longer suffer the whims of the market. Just like WalMart, just like your local grocery store, we will be able to see *consistent* monthly profits if we take *consistent* action and we learn to *control* our emotions and trade like a Vulcan. Trade like Spock. “Trade long, and prosper!”
Buy and Hold is dead! Long live Supply and Demand!
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Money Magazine addresses this in detail with a link to a study on the subject: https://money.cnn.com/2016/03/23/retirement/dollar-cost-averaging/index.html
Like others have noted B & H involves dollar-cost averaging. Not many people have 100,000 thousand dollars as a lump sum ready to invest. Especially the common uninformed hard-working employee that you are highlighting as the protagonist in your story.
The S&P is a benchmark for traders for a reason, historically it has PROVEN that an average rate of return of around 10% can be expected. Now of course if you invest at a peak you might not see those Year over year returns immediately. But if you are "investing" vs. "trading" we can assume you have a time horizon of at least 5 years into the future, if not 20. Statistically speaking you will probably see a larger return than letting your money collect interest in the bank.
But if you change your strategy and follow some bad advice on the internet and decide to trade your investments, without proper education, what's to stop an uninformed investor selling his investment at a trough, then buying higher when he realizes he messed up? Ya know the fear and greed cycle. Not to mention, now he has to pay a far larger tax on his capital gains, IF, he makes any.
You are also displaying the charts wrong and misleading people.
You look at the history of the SPX and tell us it did nothing until some fat bankers smoked some cigars and tricked everyone? Are you kidding me?
This is the same chart, but using the logarithmic scale.
From the 1870s to no the SPX has been visually trending UP. Are you sure you want to call 133343%%% gains nothing?
First... I addressed Dollar Cost averaging in another comment... It doesn't really work... Except for the Brokers who love to charge you commissions MONTH after MONTH with your monthly "dollar cost averaged contributions" instead of a lump-sum once per year.
Next, You said, correctly, "historically it has PROVEN that an average rate of return of around 10% can be expected" But that's over 30 YEARS... The investor also needs to factor in INFLATION, a factor that one often forgets when planning for retirement.
I'm not going to quibble over which inflation calculator one can use but for the sake of this conversation the one I'm going to use is the half life of the dollar: Thanks to inflation, the Dollar loses half it's value every ten years or so. So a $100,000 lifestyle today used to only cost $50,000 in 2010 and so on. (That's why my dad was able to raise us 4 kids, make my mom happy, have 2 cars, a house, a white picket fence, and send two of us to private school... What does that cost today????)
So the big lie about inflation is not that things are getting more EXPENSIVE over time... it's that we are DEVALUING the dollar over time... quantitate easing, stimulus packages (the next one is what, $1.8 TRILLION?) and printing more and more money. Like Kool-Aid... Pouring additional water into the jug doesn't make more Kool-aid... it DILUTES the Kool-Aid that is already in there!
So if you take an excel spreadsheet and put the return of the S&P over the last 30 years (link below to a resource), then start with $100,000 and have that $100K grow over those 30 years you will end up with $914,104. Not too shabby, right? a $900% return. Well, if $100,000 was worth $100,000 in 1990, you would need $200,000 in 2000, $400,000 in 2010, and $800,000 in 2020, JUST TO MAINTAIN the **VALUE** of your original investment.
So... if you started with $100,000 in 1990 and threw it into the S&P, you would have $914,104. Compare that to the original investment inflation-adjusted value, you have a net return of (drum roll please...) 14%... over THIRTY YEARS.
Of course, you need a broker to handle it, and they'll only charge a 2% ANNUAL maintenance fee on the account NET which will eat up any of the "real" growth, if one considers 14% over 30 years "growth"
So we don't need to be making 10% per year... we need to be doing that per MONTH just to keep up with inflation and to adequately prepare for our retirement... to retire WHEN we want to, for as LNOG as we want to, in the WAY that we want to.
Lastly, regarding taxes, I look forward to the day when I have to pay a MILLION DOLLARS in Income tax. Why? Because that means I would have made somewhere in the neighborhood of $5M that year. 🤑
Whew... I love trading... 😃
Trade long and trade hard, everyone...
Also accusing Vanguard of sitting around with some fatcats is pretty silly. Vanguard used to be the mortal enemy of most of the finance world. And they were not at the centre of investing until very recently, far from it.
One being, everyone has time to trade.
Two, everyone has 100,000.
Three, everyone who decides to trade will make money. I am very confident that there is a large portion of silent traders who would have made more money if they had just B&H. And that's not even counting the time lost in front of the charts when it could have been better spent building a business.
But hey, how are the sharks gonna eat if there is no prey?
And the beauty is that this power is available to EVERYONE: Forex trades down to the one ten-thousandth of a dollar! The new Micro contracts that came out several years ago make the Futures markets even that much more accessible to those with a relatively small trading account. Same goes for Options. And if you want to become skilled at trading, yes, just like any other skill it takes TIME...
But what an industry... no matter how much time you have to get started, even if just 1 hour per day, say... JUST GET STARTED...
No matter how much money you do or don't have to get started... JUST GET STARTED...
And, like any learning endeavor, if you MODEL under a good MENTOR, your learning curve can be accelerated by an order of magnitude...
I've been blessed by some good mentors and yes, when I treated trading like a hobby, it paid me like a hobby. But when I drew the line in the sand and started treating trading like a business, it has paid me better than any other business I have been in.
As one of my mentors, Tony Robbins, said, and I say it to this day, "If the WHY is big enough, the HOW will happen." The money to start will happen. The passion to do what you need to do will happen. And the right mentor, teacher, or book will happen.
Trade hard, and trade well, and let's have FUN! -A