FOOL'S EYE VIEW
Chop and Change? No Thanks!

By Alan Oscroft
July 26, 2001

Liverpool -- I've heard a lot of people recently arguing that the Fool's core message, that a Long Term Buy and Hold strategy is the best one for most people, is wrong. "If you'd stuck to a long term strategy over the last couple of years you'd have lost money," they claim.

I'm sure I can't be the only one who can see the nonsense in that assertion. Let me spell it out: "the last couple of years" is not long term. Over the short term, the stock market is volatile; unpredictably so. In fact, that volatility has to be unpredictable, because if it wasn't, we'd be able to predict it and that very act of prediction would enable us to avoid the volatility. It exists, therefore it is unpredictable.

Lip Service

That's why we stress the importance of investing for the long term. We say that we expect short term volatility and we know that there will be periods when shares lose money. But do we really embrace that idea and take it to heart? Many don't. Many just pay lip service to it. Though they "know" that there will be losing periods, they act as if it will never happen to them. And when it does happen, they panic and start discarding their long-term investment strategies like yesterday's socks.

People who are not good at short-term strategies start trying to use them, and to time the market. We hear nonsensical advice like "Use long-term strategies in bull markets, but switch to short-term strategies in bearish times."

What is a Strategy?

A strategy is your way of managing your entire investing career. As such, it must be designed to handle both bull markets and bear markets. It's no good having a long-term strategy that works "as long as a bear market doesn't come along", though that's what many would have us believe.

The epitome of a long-term strategy is, perhaps, buying an index tracker. And yes, an investment in an index tracker would have gone precisely nowhere over the last three years. But since 1918 there hasn't been a single 21-year period over which the stock market average didn't outperform cash and gilts, and that includes the big crashes of the thirties and the seventies.

If a downturn in the market has you ditching your current strategy and looking for something else, then you know what? You didn't actually have a strategy at all.

What each of us needs is a strategy that we are comfortable with; one that allows us to handle downturns with confidence, and lets us look beyond them to the real long term future. Sure, we can refine our strategies as we gain experience (in fact, we'd probably be negligent if we didn't), but if we chop and change with the economic breeze we'll never get to pin down the best way forward.

Short Term Investors

Here's a few thoughts for those who think they can successfully handle shorter-term strategies. Some people can do it, and very well too, I've no doubt of that. But they are in a small minority. Most people who think they can do it are like the 85% (or whatever) of drivers who think they're "above average".

Successful shorter-term investors share a common characteristic, though. They have genuine strategies that they have honed over a long period. And they stick to those strategies regardless of which way the market wind is blowing. Bull market? Stick to the strategy. Bear market? Ditto.

There are two things I've never seen a successful short-term strategist do. One is to attempt to time the market by diving in and out at the right times. The other is to chop and change "strategies" to try to suit the times.

Ding Dong

Remember the old adage that nobody rings a bell at the top and bottom of the market? It just happens to be true. Think you can work it out for yourself? Here are some questions to ask yourself....

How far and for how long does the market have to fall for you to know that a bull run is over? How will you tell that a subsequent bear market has reached bottom? How long will it take? How far and for how long must it move upwards again to be sure that a new bull market has started? The answers to these questions have been different for every bull and bear market we have seen so far.

Do you still think you can time it?

Hang on, I hear a bell. The market must have bottomed. Oh no, it's just the postman with a parcel.