Down goes the Dow

You are right about buying and selling the index, but you are wrong about passing losses to the buy and hold investors.

It is the traders who realize both the periodic losses, and the gains, from the daily varying index.

Ghost of Igloi wrote:

Sure, investors are encouraged to follow a buy and hold strategy yet the institutions that can collectively be called Wall Street trade in and out of stocks like a casino game. In the last two financial downdrafts (each over 50%) someone held those stocks. The behavior of passing losses to the buy and hold investor is that fiction.

I am tempted to assume that you are aware of the mathematical certainty that what you describe is false. But you seem to be serious.

Buy and hold investors by definition have essentially the same basket of stocks while the market is going up as when the market is going down. As such, no losses can possibly be passed to them.

If losses are being passed it is an absolute certainty that they are passed from the more successful traders to the less successful traders. The "buy and holders" do not even factor in at all.

Well, maybe you were just kidding. I don't know.

I am serious and not kidding. I agree in a vacuum your view is correct, but the market is far from that. Your view is flawed in this way. Index funds get distorted by unnecessary market activity and the resultant overweighting of momentum stocks that increase the risk and cost to investors. Mutual fund trading activities and overweighting of momentum stocks increase risk to investors at a substantially higher cost. For example during the tech bubble large numbers of growth mutual funds and several indices were distorted and encouraged by Wall Street actors. During the housing bubble the same distortions were present in bond and stock mutual funds and indices when the threat was apparent. The debate over high frequency trading has this phenomenon as an outcome, there is little cost or risk of this activity to the institutional trader, especially when it is financed at near zero rates.

On a secondary level losses can be realized and unrealized. The investor that purchased 100 shares of Lucent Technology in the spring of 2000 at $60 a share now holds 10 shares of Alcatel-Lucent at $3 today. The investor that purchased 100 shares of Citigroup at $50 in 2005 now owns 10 shares at $55 a share. Are those losses, you tell me?

Lastly, most investors ARE NOT buy and hold. They will flood into the market at the top and sell too often sell at the bottom. In the end someone WILL OWN stocks at the bottom.

Ghost of Igloi wrote:

On a secondary level losses can be realized and unrealized. The investor that purchased 100 shares of Lucent Technology in the spring of 2000 at $60 a share now holds 10 shares of Alcatel-Lucent at $3 today. The investor that purchased 100 shares of Citigroup at $50 in 2005 now owns 10 shares at $55 a share. Are those losses, you tell me?

Those are not losses since they are unrealized.

Please see my discussion in the previous post. One should view all unnecessary trading and churning of stocks as a negative. Of course if one wishes to gloat about cashing in on a trade while leaving someone else holding the bag, well OK. I cannot see how this will end well for the buy and hold or any other type of investor. It is my view and my experience, and perhaps it will all work out, but I just don't believe it ends well.

OK, I give in and you win.

And you can pray that someday the Fed will make you whole again.

I appreciate your acquiescence. It's big of you to admit that you're wrong.

And best wishes to you with your unrealized losses.

"Of course if one wishes to gloat about cashing in on a trade while leaving someone else holding the bag, well OK."

What are you, a socialist?

This comment was enough to bring me out of retirement, just this one time. I have done fantastically well since I left the thread maybe a month ago, especially recently. So well, in fact, that I have hit my targets for the year, after tax, and then some. I will therefore be backing off significantly for the second half of the year.

Whomever is left "holding the bag" is left holding it voluntarily. The market is made up of transactions between willing sellers, and willing buyers, free of coercion and undue influence. When somebody buys at a price, they indicate their belief in the value of the stock at that price. If they subsequently act unwisely with respect to the disposition of that stock, too bad. Nobody is forced to be in the market, and not everybody is forced to realize losses.

This is the entire point of a free market. THE ENTIRE POINT.

All that is left is to minimize transaction costs and maximize efficiency.

Your comment was incredible to me. What about all those like Flagpole who bought before various crashes, held on, and eventually emerged in a favorable position? Are they stupid for having "bought high"?

Hopefully it was a troll who posted that.

Ghost of Igloi wrote:

John Hussman has a commentary track record that goes back longer than any other source I know. Hussman backs up his thoughts with data. He will publicly admit to his errors. Feel free to ignore one of the most thoughtfull market commentators if you like. I agree with his analysis that the market extremely overvalued.

So how much money have you invested with him and how has that worked out for you ? If I went that route I would rather stick my $ in US treasuries and use the interest payments to purchase out of the money puts on the indexes, at least I wouldn't loose my principal.

Ghost of Igloi wrote:

And best wishes to you with your unrealized losses.

Like any other investor, I've got some of those. But they are a minority position.

I am certainly not a socialist and you missed the context of my comment. Market participants in activities like high frequency make the market less democratic. Do you view the activities of the Federal Reserve to be socialist? Certainly Federal Reserve quantitative easing has distorted adequate price discovery. I think your view that it is a free market is in theory only, since those entities we can call Wall Street have the ability to make the market less free.

Getting back to holding the bag analogy. Market participants with the encouragement from the government drove Chinese markets to extreme valuations. Some peasant with little more than a couple of Yuan to rub together is looking at some very serious losses. That is sad and yes it is part of the market.

In our current market cycle someone will be buying at the top, and they will be left holding the bag. That destruction of wealth does not need to go to that extreme. Greed is part of the market for the winner and the loser.

I am for making the market more transparent and more democratic.

I think John Hussman is one of the most thoughtfull writers and I look forward to his weekly commentary. I have never invested in his fund, but I think it would be worth looking at.

POTO,

Looks like China was RISK return of -22%.

My answer to this current market situation is what it always is...

...it depends on your closeness to retirement mainly and then some other extreme things could change what you do now.

Example of an extreme thing...you just inherited 2 million dollars. If that's your situation, then you have a lot of things you could do.

But, for the average investor with no extreme things on the horizon, continuing to invest in the market if you are not yet retired is the way to go.

Within 10 years, if you want to put in a little extra at any time for any reason, it's not a bad idea. Once you get within 5 years, you might want to be a bit more conservative with putting in extra, but again, that depends on your situation.

In any event, you should make sure that by the time you retire you:

1) Are debt free including owning your home outright.

2) You either have 30% or more in bonds, OR you are 100% invested in stocks with at least 3 YEARS of expenses saved in a liquid way.

A married couple who had even halfway decent jobs, if they retire debt free and own their home outright and have no extreme situations, can live on Social Security income taken at age 65. Any extra money from investments is just gravy.

BUT, or course if you don't want to rely on SS or want to have a GOOD retirement or want to retire earlier than age 65, then investing is key.

"The behavior of passing losses to the buy and hold investor is that fiction."//////////////////////////////////////////////

I consider it unfortunate that you lack the basic level of integrity needed to admit your obvious error. We saw the same behavior from you earlier when you were called out regarding the 90/10 portfolio magically outperforming the 100% stock portfolio. And now this ^.

Perhaps you simply allow your emotions to get in the way of seeing that which is clearly true. It appears that, like many others, you get caught up in repeating essentially meaningless rhetoric.

Well, I suppose that life as an irrational investor (and commentator) can't be all bad. You are certainly in the majority on that count.

Stenty wrote:

Ghost of Igloi wrote:

On a secondary level losses can be realized and unrealized. The investor that purchased 100 shares of Lucent Technology in the spring of 2000 at $60 a share now holds 10 shares of Alcatel-Lucent at $3 today. The investor that purchased 100 shares of Citigroup at $50 in 2005 now owns 10 shares at $55 a share. Are those losses, you tell me?

Those are not losses since they are unrealized.

Unless you are simply talking about tax consequences your statement is clearly false.

OK. You know nothing about my integrity or lack there of. My comments to you are as follows:

Your inability to understand unconventional thinking will paint you into a corner.

In regards to the 90/10 portfolio I showed plenty of information showing my comment was not off the mark and not an obvious error.

For six years the market has been led by central bank monetary policy. China with its controlled economy was in the best position to keep the fascade going. There is an argument to be made that the policy of easy plentiful money is unraveling.

If you believe differently keep buying the dip. If that is the case I would buy anything technology, social media, biotechnology, literally anything with high multiple and no earnings.

Even Mr. Spock would understand.