Comments on: How to Make Money in the Stock Market http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/ personal finance tips, tricks, and commentary Sat, 21 Nov 2009 18:35:25 -0500 http://wordpress.org/?v=abc hourly 1 By: retirehappy http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/comment-page-1/#comment-79105 retirehappy Wed, 29 Aug 2007 21:16:53 +0000 http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/#comment-79105 Fight fight fight! Fight fight fight!

]]> By: The Finance Buff http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/comment-page-1/#comment-79077 The Finance Buff Tue, 28 Aug 2007 04:38:12 +0000 http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/#comment-79077 I wrote the post Jonathan referred to in comment #19. If you think it was a *huge* oversimplification, I'd like to see how *huge* you think the oversimplification was. If I give up a factor of a billion, the odds are still *huge* against missing the 10 best days. Under what assumptions can you get the odds of missing the 10 best days up from one in 2.8 billion billion billion to say one in 1 billion? Even then, is it worth talking about a one in a billion event? I wrote the post Jonathan referred to in comment #19. If you think it was a *huge* oversimplification, I’d like to see how *huge* you think the oversimplification was. If I give up a factor of a billion, the odds are still *huge* against missing the 10 best days. Under what assumptions can you get the odds of missing the 10 best days up from one in 2.8 billion billion billion to say one in 1 billion? Even then, is it worth talking about a one in a billion event?

]]> By: nickel http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/comment-page-1/#comment-79041 nickel Fri, 24 Aug 2007 12:17:34 +0000 http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/#comment-79041 Jonathan, while that post is correct that this overstates the problem in that people won't miss just the 10 best days of the market, it completely ignores that fact that the biggest days often come in the earliest stages of a recovery. For example, looking over the past 25 years, three of the 10 biggest days came in the week and a half following Black Monday, and two more of them occur in close succession at the very tail end of the dot bomb debacle. Thus, these days are concentrated into periods when people are especially likely to have bailed on the market and not gotten back in. Consider the scenario in which sometimes gets smacked on Black Monday, jumps out of the market to lick their wounds, and then immediately misses gains of 9.3%, 5.3% and 4.9%. They've now locked in a huge loss that they had little chance of avoiding in the first place, and they also missed out on a huge recovery. Calculating the probability that people will randomly miss the ten best days is a *huge* oversimplification, and it casts doubt on the entire argument. If you haven't seen it yet, I've written a <a href="http://www.fivecentnickel.com/2007/08/24/how-to-make-money-in-the-stock-market-revisited/" rel="nofollow">followup analysis</a> that talks about some of these things, and also expands the dataset. Jonathan, while that post is correct that this overstates the problem in that people won’t miss just the 10 best days of the market, it completely ignores that fact that the biggest days often come in the earliest stages of a recovery.

For example, looking over the past 25 years, three of the 10 biggest days came in the week and a half following Black Monday, and two more of them occur in close succession at the very tail end of the dot bomb debacle. Thus, these days are concentrated into periods when people are especially likely to have bailed on the market and not gotten back in.

Consider the scenario in which sometimes gets smacked on Black Monday, jumps out of the market to lick their wounds, and then immediately misses gains of 9.3%, 5.3% and 4.9%. They’ve now locked in a huge loss that they had little chance of avoiding in the first place, and they also missed out on a huge recovery.

Calculating the probability that people will randomly miss the ten best days is a *huge* oversimplification, and it casts doubt on the entire argument.

If you haven’t seen it yet, I’ve written a followup analysis that talks about some of these things, and also expands the dataset.

]]> By: Jonathan http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/comment-page-1/#comment-79036 Jonathan Fri, 24 Aug 2007 08:43:30 +0000 http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/#comment-79036 Although I didn't write it and don't necessarily agree with it, here is a related post by the Finance Buff about this stuff called <a href="http://thefinancebuff.com/2007/07/out-of-market-and-meaningless-stats.html" rel="nofollow">Out of the Market and Meaningless Stats</a>. Although I didn’t write it and don’t necessarily agree with it, here is a related post by the Finance Buff about this stuff called Out of the Market and Meaningless Stats.

]]> By: Matt Wolfe http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/comment-page-1/#comment-79035 Matt Wolfe Fri, 24 Aug 2007 05:10:48 +0000 http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/#comment-79035 This is some great information. I totally agree that the best strategy is to just hang in there. This is some great information. I totally agree that the best strategy is to just hang in there.

]]> By: MoneyNing http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/comment-page-1/#comment-79033 MoneyNing Fri, 24 Aug 2007 04:50:06 +0000 http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/#comment-79033 Simple and great! I bet if he was still at Merrill Lynch the stock wouldn't be hit as bad. Simple and great! I bet if he was still at Merrill Lynch the stock wouldn’t be hit as bad.

]]> By: Market Flavor http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/comment-page-1/#comment-79032 Market Flavor Fri, 24 Aug 2007 04:49:17 +0000 http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/#comment-79032 I love that data! It really shows us how you can't time the market and you need to stay invested for the long haul. But it also makes you wonder what the returns would be if you had missed some of the down days of a bear market. I love that data! It really shows us how you can’t time the market and you need to stay invested for the long haul.

But it also makes you wonder what the returns would be if you had missed some of the down days of a bear market.

]]> By: Aaron http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/comment-page-1/#comment-79031 Aaron Fri, 24 Aug 2007 01:53:56 +0000 http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/#comment-79031 This is a very simple quote and some may even find it funny, but it is so true. Peter Lynch certainly understands how the market works, and individual investors that listen to him should do well. This is a very simple quote and some may even find it funny, but it is so true. Peter Lynch certainly understands how the market works, and individual investors that listen to him should do well.

]]> By: accumulatingmoney http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/comment-page-1/#comment-79030 accumulatingmoney Thu, 23 Aug 2007 23:29:31 +0000 http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/#comment-79030 Lol, we are having the same thoughts. I wrote a post yesterday about missing the biggest days in the stock market, and I included Peter Lynch's quote as well. Must be due to the bad advice about getting out of the market until you feel confident again. Lol, we are having the same thoughts. I wrote a post yesterday about missing the biggest days in the stock market, and I included Peter Lynch’s quote as well.

Must be due to the bad advice about getting out of the market until you feel confident again.

]]> By: Cindy http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/comment-page-1/#comment-79027 Cindy Thu, 23 Aug 2007 19:33:45 +0000 http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/#comment-79027 Hey Nickel, I'd love to see a post expanding on the point you made in comment #7... that is, that many of the big-advance days are just after a fall or correction in the market. That would really put the last pig in the barn for me... because I might be able to get out of the market, but I'd probably be still licking my wounds and unable to get back in when the market is at bottom. I think this is the biggest psychological problem of timing the market, knowing when to get back in. And your post illustrates it nicely! Hey Nickel, I’d love to see a post expanding on the point you made in comment #7… that is, that many of the big-advance days are just after a fall or correction in the market.

That would really put the last pig in the barn for me… because I might be able to get out of the market, but I’d probably be still licking my wounds and unable to get back in when the market is at bottom. I think this is the biggest psychological problem of timing the market, knowing when to get back in.

And your post illustrates it nicely!

]]> By: nickel http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/comment-page-1/#comment-79025 nickel Thu, 23 Aug 2007 18:43:42 +0000 http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/#comment-79025 True enough, but the odds of success are substantially higher in the stock market than they are in the lottery. ;) True enough, but the odds of success are substantially higher in the stock market than they are in the lottery. ;)

]]> By: mapgirl http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/comment-page-1/#comment-79024 mapgirl Thu, 23 Aug 2007 18:31:58 +0000 http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/#comment-79024 This reminds me of a chat I had at lunch about the lottery. You'll never win it if you don't bother getting in. There may be bad days, but they are balanced by the good days, so either way, a person ought to get into saving and investing. I'm all about down markets like this one because it means that there will up days later. Might not be a week from now, but inexorably they will arrive. This reminds me of a chat I had at lunch about the lottery. You’ll never win it if you don’t bother getting in.

There may be bad days, but they are balanced by the good days, so either way, a person ought to get into saving and investing.

I’m all about down markets like this one because it means that there will up days later. Might not be a week from now, but inexorably they will arrive.

]]> By: razmaspaz http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/comment-page-1/#comment-79022 razmaspaz Thu, 23 Aug 2007 15:23:50 +0000 http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/#comment-79022 Like I said, no advocacy of market timing here. Get in for the long haul, and be smart about where you put your money so that it reflects aversion to bad risk (like sub prime lending) and attraction to good risk. Keep your money in the market and you will get 10-11% in the long haul. Figure out ways to minimize your losses during the bad days, and maximize the profits in the good days, and you will eek out an extra 1-2%. For most the added time spent doing that will not be worth the minimal added reward. For me, I enjoy managing it on a weekly/daily basis, and I don't mind spending the extra time. Only time will tell if it was worth it. Like I said, no advocacy of market timing here. Get in for the long haul, and be smart about where you put your money so that it reflects aversion to bad risk (like sub prime lending) and attraction to good risk. Keep your money in the market and you will get 10-11% in the long haul. Figure out ways to minimize your losses during the bad days, and maximize the profits in the good days, and you will eek out an extra 1-2%. For most the added time spent doing that will not be worth the minimal added reward. For me, I enjoy managing it on a weekly/daily basis, and I don’t mind spending the extra time. Only time will tell if it was worth it.

]]> By: nickel http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/comment-page-1/#comment-79020 nickel Thu, 23 Aug 2007 14:58:01 +0000 http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/#comment-79020 Mike: True. This misses out a 22% (<i>not</i> 25%) loss in 2002, but it includes a 9% loss in 2000 as well as a 12% loss in 2001, and it also includes the dark days of 1987. You are, of course, right in that a big challenge is getting people to think 20 years down the road. Mike: True. This misses out a 22% (not 25%) loss in 2002, but it includes a 9% loss in 2000 as well as a 12% loss in 2001, and it also includes the dark days of 1987.

You are, of course, right in that a big challenge is getting people to think 20 years down the road.

]]> By: nickel http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/comment-page-1/#comment-79019 nickel Thu, 23 Aug 2007 14:53:09 +0000 http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/#comment-79019 Raz: The challenge is to consistently be "scared at the right time," and to likewise get your courage back at the exact right moment. Do you think you can consistently do this over the long haul? If so, there are an awful lot of mutual funds out there that would love to hire you. Raz: The challenge is to consistently be “scared at the right time,” and to likewise get your courage back at the exact right moment. Do you think you can consistently do this over the long haul? If so, there are an awful lot of mutual funds out there that would love to hire you.

]]> By: nickel http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/comment-page-1/#comment-79018 nickel Thu, 23 Aug 2007 14:52:00 +0000 http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/#comment-79018 Raz: That's a valid point, except that it's virtually impossible to predict with any sort of accuracy when those bad days will be, in the same sense that you can't predict when the good days will be. The fact of the matter is that the stock market has an overall upward trajectory. Thus, the good days will outweigh the bad days. As it turns out, the upward moves often come in strong (but short) bursts that are incredibly easy to miss. In fact, these are often concentrated in the early stages of recoveries, before the typical investors knows what's going on. Thus, the deck is stacked against you if you jump out of the market and then try to go back in once things are looking brighter -- more often than not, you'll have already missed the biggest before you get back in. Raz: That’s a valid point, except that it’s virtually impossible to predict with any sort of accuracy when those bad days will be, in the same sense that you can’t predict when the good days will be. The fact of the matter is that the stock market has an overall upward trajectory. Thus, the good days will outweigh the bad days.

As it turns out, the upward moves often come in strong (but short) bursts that are incredibly easy to miss. In fact, these are often concentrated in the early stages of recoveries, before the typical investors knows what’s going on. Thus, the deck is stacked against you if you jump out of the market and then try to go back in once things are looking brighter — more often than not, you’ll have already missed the biggest before you get back in.

]]> By: razmaspaz http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/comment-page-1/#comment-79017 razmaspaz Thu, 23 Aug 2007 14:46:51 +0000 http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/#comment-79017 Patrick, Like I said I'm no advocate of market timing. I sat through the decline, took my lumps, and am now seeing the rewards of my patience with the market. However, I had a hunch at about 13,800 in the dow that things were about to turn sour. The amount of money that I moved out of what I felt were risky investments saved me a lot of losses. I took losses, but not like I might have. I'm now in position to use that money to buy even more after the decline. To an extent I was a scared investor, but I was scared at the right time, not when it was too late. I guess the point that I wasn't making very well before, is that I'd rater miss a couple good days running up to the 23% decline day, than be in the market when the crash comes. Patrick,
Like I said I’m no advocate of market timing. I sat through the decline, took my lumps, and am now seeing the rewards of my patience with the market. However, I had a hunch at about 13,800 in the dow that things were about to turn sour. The amount of money that I moved out of what I felt were risky investments saved me a lot of losses. I took losses, but not like I might have. I’m now in position to use that money to buy even more after the decline. To an extent I was a scared investor, but I was scared at the right time, not when it was too late. I guess the point that I wasn’t making very well before, is that I’d rater miss a couple good days running up to the 23% decline day, than be in the market when the crash comes.

]]> By: Brad http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/comment-page-1/#comment-79016 Brad Thu, 23 Aug 2007 14:41:42 +0000 http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/#comment-79016 Mike, that is a phenomenon that hurts Americans in all walks of life-- the inability to think about the future. People would rather consume now than delay gratification, and this is a killer in personal finance and retirement planning. I'm just a year older than your brother and have run the numbers . . . if I don't think about 20+ years NOW, I'll have to work 10x harder to catch up later. Keep working on your brother, and maybe he'll come around. Mike, that is a phenomenon that hurts Americans in all walks of life– the inability to think about the future. People would rather consume now than delay gratification, and this is a killer in personal finance and retirement planning. I’m just a year older than your brother and have run the numbers . . . if I don’t think about 20+ years NOW, I’ll have to work 10x harder to catch up later. Keep working on your brother, and maybe he’ll come around.

]]> By: Mike http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/comment-page-1/#comment-79015 Mike Thu, 23 Aug 2007 14:35:49 +0000 http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/#comment-79015 I noticed that the statistics conveniently ignore the stock market implosion where the S&P dropped 25% in 2002. And the problem with long-term thinking is that it's pretty darn hard to get people to think 20 years in the future. I've had this conversation with my brother (27) and he just isn't interested in thinking that far out. This is especially true when they have a vague remembrance of the dot-bomb years. That's why the people who are willing to stick it out will get the >10% return. I noticed that the statistics conveniently ignore the stock market implosion where the S&P dropped 25% in 2002. And the problem with long-term thinking is that it’s pretty darn hard to get people to think 20 years in the future. I’ve had this conversation with my brother (27) and he just isn’t interested in thinking that far out. This is especially true when they have a vague remembrance of the dot-bomb years. That’s why the people who are willing to stick it out will get the >10% return.

]]> By: Patrick Szalapski http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/comment-page-1/#comment-79014 Patrick Szalapski Thu, 23 Aug 2007 14:26:08 +0000 http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/#comment-79014 Raz, that is true except doesn't really apply to the "scared-investor" phenomenon we are concerned about: The market drops, the scared investor pulls out, and then the market continues as it always has. The scared investor by definition was in the market during the "worst" day but has a good chance of also missing the "best" day. Instead, a steady investor endures the worst and benefits from the best; in the end, the best comes out on top. Raz, that is true except doesn’t really apply to the “scared-investor” phenomenon we are concerned about: The market drops, the scared investor pulls out, and then the market continues as it always has. The scared investor by definition was in the market during the “worst” day but has a good chance of also missing the “best” day. Instead, a steady investor endures the worst and benefits from the best; in the end, the best comes out on top.

]]> By: razmaspaz http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/comment-page-1/#comment-79013 razmaspaz Thu, 23 Aug 2007 14:12:49 +0000 http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/#comment-79013 This statistic always bugs me. By no means would i advocate timing the market, but if you're gonna bring up statistics like that you need to show the flip side. What would your return be if you were out of the market for the 10, 20, 50 WORST days over that time period. Lets say for instance. If I had taken my money out on Jan 1 of this year, and kept it out until Aug 14, I would have missed a hug run up of the S&P to 1550, but I would have also missed the sharp decline. In fact I'd be even money just like everyone else. If you are going to highlight what you miss by doing that, also point out what you gained. This statistic always bugs me. By no means would i advocate timing the market, but if you’re gonna bring up statistics like that you need to show the flip side. What would your return be if you were out of the market for the 10, 20, 50 WORST days over that time period. Lets say for instance. If I had taken my money out on Jan 1 of this year, and kept it out until Aug 14, I would have missed a hug run up of the S&P to 1550, but I would have also missed the sharp decline. In fact I’d be even money just like everyone else. If you are going to highlight what you miss by doing that, also point out what you gained.

]]> By: Patrick Szalapski http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/comment-page-1/#comment-79012 Patrick Szalapski Thu, 23 Aug 2007 13:06:53 +0000 http://www.fivecentnickel.com/2007/08/23/how-to-make-money-in-the-stock-market/#comment-79012 Wow. Very good point: we endure the really bad days without selling because we never know when the really good days will come--but they always come and are always better than the bad days are bad. This is also true in poker: it is better to stick around and win a few big pots than to "strike when its hot" and win a bunch of little pots, when you have a good hand. However, in poker, you have to be well above average skill to win money; in the stock market, you just have to be lazy. Wow. Very good point: we endure the really bad days without selling because we never know when the really good days will come–but they always come and are always better than the bad days are bad.

This is also true in poker: it is better to stick around and win a few big pots than to “strike when its hot” and win a bunch of little pots, when you have a good hand. However, in poker, you have to be well above average skill to win money; in the stock market, you just have to be lazy.

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