Oh so close! I was holding a stock, waiting for a positive earnings release, with the full intent of exiting stock ownership for good once I saw a nice bump to reward me for my time and risk. Instead, I watched a combination of a bear market, overly optimistic analysts and a heavy short position drop my stock 50% in 2 days.
This was so typical of my experiences on the market: years of careful effort and minor gains, more than erased in seconds on the stock market.
Now before you start to think this is purely emotion, remember that I was already planning on exiting before my recent calamity, and here are some reasons why:
1) Given Enough Time, the Market Used to be a ‘Sure Thing’… NOT Anymore!
When I entered investing ca. 1998, this is what the trend on the Dow Jones Industrial average looked back to approximately the time of my birth:
Sure thing right? Little burp back in ’87, but if you look at any 10 year period you are still in the money.
Now look at plot of the market over my ~12 year trading career:
Hmmm… not such a sure thing. Lets assume I made all my purchases back at 8000, and not at 11,000 and 14,000 like I actually did, and I actually had an index fund (and not a bunch of crappy tech stocks). My potential gain was about 10,000-8,000 = 2,000 or about 20%.
Guaranteed funds provide a compounded annual growth rate (CAGR), but relatively low rates (low single digit), so it is worthwhile understanding what kind of CAGR this gain translates into. To get a 20% gain over ~12 years, you would only need a CAGR of 1.88%. You can EASILY have found a GUARANTEED fund that would have returned more than this! Keep in mind I am already using a best-case scenario, not including this notable stock that I did invest in:
2) So if you were a lot smarter than me, and stuck with index funds, you at least saw some gains right?
Again, not so fast!
The Dow Jones is based on the US dollar value of stocks. What has happened to the value of the US dollar since 1998? At the start of 1998 $1 US would purchase about $1.44 Canadian. Today, they are trading close to parity, meaning that the USD has actually depreciated about 40%.
Lets see what happened to the $8000 USD we invested in the DJIA index fund: we used about $11,500 Canadian to purchase that $8000 USD, rode it up to $10,000 USD which is now worth $10,000 CDN! We have actually lost $1,500! That isn’t even counting the opportunity cost of that money.
3) Give it your full attention, or not at all.
I only worked one or two stocks where I could play close attention to the nuances of the particular business, and the market that they were in (think Apple). I found that even with this detailed focus, I still couldn’t keep track of all the important metrics that could have a significant impact on the stock (like exchange rate trends, short position, the macro market trend). I could never put in a sufficient amount of money in to create the gains that would justify my time. For example, even though I kept buying AAPL from $120, all the way down to $80, and all the way back up to sale at $185, I still didn’t make any money due to interest charges, trading charges, and exchange rate fluctuation! I was so surprised come tax time that I had to perform the calculations 5 times to convince myself the net was $0!
4) Analysts are a flaming pile of crap.
I think only meteorologists are paid for being so consistently wrong, and compared to stock analysts, they are oracles.
That is why I was planning on getting out of the market for good, and focussing on low risk money market funds, guaranteed funds, or bricks of cash under the mattress. Now I have to wait and see if the stock can dig itself back out of its hole.