Do You Invest Like You Play The Flute?

I wish I could remember how many times in the 20 years I’ve been investing in shares that I’ve heard someone say something like “The trouble with investing for the long term is that it commits you to investing during downturns, too“. It’s an obvious truism, but what are these people suggesting as an alternative?

In effect, what they’re really saying is: ‘The best strategy is to only buy shares that are going to go up in the short term, and never buy ones that will go down!’ Well, that’s about as much use as Monty Python’s famous lesson on how to play the flute: “You blow in the hole and move your fingers up and down the outside.”

You reckon?

It’s really pretty obvious that if you only invest in short-term rises in the market, and sell ahead of all the short-term falls, you’ll wipe the floor with all those long-term investors out there.

But for that to be an even remotely practical strategy, just like needing to know exactly how to finger your wind instrument, you’d need to know how to tell when the short-term ups and downs are going to happen.

And never in the long history of stock markets has anyone ever come close to working out how to do that. It’s obvious really, if you think about it. If it’s possible to tell today that a share is going to start falling tomorrow, then everybody will have worked it out yesterday and the price will already be on its way down today. And if yesterday they could tell it was going to go down today, they’d have worked it out the day before and…

Where did they go?

Extrapolated to the long term, if we could tell when the ups and downs were going to happen, by buying and selling that much earlier we’d stop them happening — and the stock market’s progress would be a lot smoother and steadier over the long term than it actually is.

If we need more evidence that the stock market cannot be called in the short term, we really only need to look at the great investors — Benjamin Graham, Warren Buffett, Peter Lynch, David Dreman, Neil Woodford… How many of them owe their success to their ability to call the market and time it right for getting in and out when the short-term ups and downs come along? The answer is none. How many achieved great wealth by buying good quality companies and holding them for the long term? Every single one of them.

Money, meet mouth

Do you reckon you can do better than these greats? No? Do you know any way of only buying shares when they’re about to go up and never buying ones that are about to go down? No? Well don’t bother me with your “The trouble with investing for the long term…” nonsense then. And don’t tell me how to play the flute until you can delight me with Bach’s Partita in A minor.

The simple truth is that if we are not able to time the market — and we are not — then the only thing that makes sense is to analyse individual companies and buy the ones that look like good value with a long-term horizon.

And finally…

Don’t forget to tune in next week, when I’ll tell you how to cure the world of all known diseases.

In the meantime, you could do a lot worse than checking up on a strategy that can bring great long-term rewards.

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