Instant Gratification or Complete Apathy

By: Michael Kilbach | Fri, Jan 29, 2010
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The financial markets have millions of people competing for profitable trades but unfortunately their natural instinct gets in the way of the final goal. Through evolution these investors are programmed to proceed (buy stocks) when they are feeling confident and run (sell) when they are scared. The result of this "basic instinct" mentality is the classic, buy high and sell low, losing trade.

It is our opinion that the average investor falls into one of the following two categories.

  1. Apathetic, uninterested, do nothing, buy and hold indefinitely

  2. Very active, interested, over trade, instant gratification

Is one of these you?

Apathetic, uninterested, do nothing, buy and hold indefinitely.

This investor typically has no interest in the topic of investing yet naively believes that by following a few cookie cutter principles they will outperform the market and retire comfortably. This investor tends not to question an advisors motive or consider potential conflicts of interests or even the source of their advice but generally "follows the crowd." Their long term investment decisions are often outdated and their portfolios can sometimes underperform for decades. Interestingly enough, this investment mentality continues on and on without questioning assumptions. On the contrary, this type of investor will defend failing strategies again and again while waiting to hopefully one day be proven correct.

Very active, interested, over trade, instant gratification.

This investor is generally interested in the financial markets and actively seeks out advice, guidance and strategies. However, the fatal flaw of this investor is the expectation of unrealistic results the moment a position is taken. The active trader tends to chase performance by buying the latest hot tip too late and selling it after it drops. This investor will watch financial television programming and constantly jump from one idea to the next, expecting to be given very specific, "no risk" advice for instant, high profit returns. These investors sometimes fall for the 'big talking', 'big hype' marketing guy who promises outrageous and unrealistic short term trading results. Unfortunately the interested, active investor can even underperform the apathetic investor by constantly placing unprofitable bets and locking in losses again and again.

So what is the secret to easy, profitable investing? There is none.

Can an investor recognize their natural instincts, thereby improving their probability of success? We think so.

We have written many articles about recognizing long term trends and rotating asset classes for superior returns. To read these free articles we suggest you visit investmentscore.com. In this article we are focusing on the current silver and gold bull market.

Let's look at where the big money has been made in the current 2000 - 2010 precious metals bull market.

The above chart illustrates that there has only been about four periods of time in which adding to positions really made sense. Obviously it makes sense to add to positions in the red sections prior to the next burst higher and then take profits as the price rises in the green sections. Remarkably, the average investor wants to buy during the green portions of the chart as they continue to bet on the price going even higher. As you would guess, this same investor typically ends up selling when the price drops and trades sideways in the red sections of the chart. This is because the low price creates fear and the investor "runs" by selling positions.

The above chart illustrates that silver, like most markets, is trending sideways or thrashing up and down the majority of time. Aside from periods of short lived bursts higher, the silver market experiences frightening drops or it simply trades sideways.

The above chart shows us that since 2002, the longest duration of a major up move in silver was about 11 months, the shortest duration was 7 months and the average advance lasted about 9 months. This is important for two reasons.

  1. Like the first chart, this tells us that the price of a rising market is not actually heading higher the majority of the time, but it is more typically dropping or trading sideways, scaring investors away.

  2. The duration of the current advance is about thirteen months and that is much longer than the past three advances. Given this fact, we wonder why investors are desperate to find the next short term buying opportunity when this current advance has already lasted considerably longer than the rest. If the average duration of the last three advances is around nine months and the current advance is already thirteen months long, history would suggest that even higher prices in the coming months is a risky bet. Can silver and gold head higher in the short term? Absolutely! But when the price of silver has been advancing for thirteen months, longer in duration than any other point in the current bull market, does it make sense to buy more at this point?

It is our opinion that the average "Buy and Hold" investor continues to lose money in the market as they hold onto their outdated broad market stocks. Over the past ten years the place to invest has been hard assets and not the Dow Jones. The last decade of poor investing has cost the "Buy and Hold" investor dearly.

The "Active Trader" may have found commodities as they have come in and out of popularity over the past ten years. However, the "Active Trader" is likely to buy in as the price rockets higher and then sell out at a loss a few months down the road, cursing the markets as they go.

Both of these flawed strategies and poor results must be very frustrating and yet many investors continue to hold to their convictions and do the same thing over and over again.

At investmentscore.com we do not have a magic bullet, fool proof strategy to investing. However, we recognize the flaws many investors make and we have created proprietary indicators that help us increase our probability of success. To sign up for our free newsletter and to learn more about our strategies as well as our paid service we encourage you to visit us at www.investmentscore.com. Good luck.

 


 

Michael Kilbach

Author: Michael Kilbach

Michael Kilbach

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