As you remember, September stunk big time. October, however, was wonderful. It was up by more than September was bad. Be careful when looking at these short-term swings. They really do not mean anything.
The stock market has fluctuated a lot over the last year. It has fallen and risen, and we’re sure you want to know what is going to happen in the near future. The truth is we don’t know. It is impossible to know and anyone claiming to know is either wrong or lying. The movements of the stock market in the short term are random. Every person who buys or sells a security (whether the reason is smart or stupid) will drive the stock price up or down. In the long term (years) we can make a reasonable prediction that rationality will prevail because historically it has. However, in the short term it is just noise.
The very important takeaway from that statement is meaning cannot ascribed to that noise. Predictions cannot be made. If the stock market plummets 50%, it doesn’t mean that in the next month it won’t plummet another 30%. It could plummet 30%, it could rise 80%, there’s no way to know. It also applies to the converse, the stock market rising 100% doesn’t reveal anything regards to whether or not it will rise or fall in the short term. In the long term there is a concept called reversion to the mean. An abnormal result will eventually reverse itself. However, short term delusion is unpredictable in its duration.
It is tempting to buy more when the stock market rises and sell when the stock market falls. That is in our opinion a bad way to invest. You cannot assume that past stock movements are going to mean anything to the future. After making your purchases, future stock movements are unpredictable. We invest based on a fundamental analysis approach. We invest in mutual funds that are broad market indexes that are in turn weighted based on value vs growth and small cap vs large. When we invest directly in companies, we choose the undervalued based on an analysis of their financial statements. We don’t invest based on technical analysis (analyzing the movement of stock prices) because we think technical analysis is nonsense.
We are going to make the recommendation that regardless of what the stock market does, you stick to your financial plan. Ignore greed and fear and instead invest in companies that you believe in. Ignore the past price movements of the security because it is not relevant. Just invest and wait. We assert that eventually patience will be rewarded.
If you have any questions about your investments, please call at any time. We sincerely hope you got value from this newsletter.
We appreciate your business and trust.
Dan and Eli
As we’re writing these to help our readers, we would be very appreciative of any input in regards to what we should write next. If you want us to write about a particular topic, please contact me. Please contact me if you would like to submit a post to our blog.
If anything that we mentioned above interests you, please consider downloading our free e-book. The book contains our thoughts on investment management and some information that we think everyone should know. You can also download it below.
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