Most people will never forget their first love. I'll never forget my first trading profit! But the $600 (in 1970 dollars) I made on Royal Dutch Petroleum was not even close to as important as the idea I got from it. I couldn't believe that someone would buy my stock for so much more than what the newspaper said it was worth just a few weeks earlier. What was different? What happened to make the stock go up, and why was it going down in the first place? I've been trading RD for 36 years, and I've never had to know the answers! If you did this with a lot of high-quality, profitable companies, you would find that: 1) most stocks go up and down regularly, if not predictably, with a long-term tendency to go up; and 2) there isn't much, if any, similarity in when the stocks go up and down. This is what most people are afraid of, and Wall Street wants them to be afraid of. It can be very narrow and only cover a few areas, or it can be very broad and cover almost everything. The more widespread it is, the more likely it is to be a rally or a correction. Most years, one or two of each will happen. This is just the way things work on the stock market. Call it Mother Nature, Inc. Don't take her for granted when she's happy, and don't forget about her when she's sad. Accept her mood swings and work with them in whatever way they go, and she will become your love, too. Ironically, the only real "certainty" in the financial markets is this natural volatility, which is caused by a huge number of human, economic, political, natural, etc. factors. And, as crazy as this may sound until you experience it for yourself, it is this one and only certainty that makes Mutual Funds in general and Index Funds in particular totally unsuitable as investment vehicles for anyone within seven to ten years of retirement. How many people who invested in Mutual Funds recently retired with more cash on hand than they did seven years ago, in 1999? There will always be protests and changes. In fact, "going back to the future" is a good way to set up a realistic Investment Strategy. In the last forty years, there have been at least ten corrections of 20 percent or more, followed by rallies that pushed the market to much higher levels. Before its record 40 percent drop in 1987, the DJIA reached its highest point of 2700. But at 1700, it was still 70% above the 1000 mark, which it had been dancing around for decades—always going up, rarely going down. After the disaster of 1987, there were a few less dramatic corrections, but the case was being made for an Investment Strategy that was more flexible and based in reality. Buy and hold thinking gave rise to mutual funds. Mother Nature, Inc., on the other hand, is a much more complicated business. Call it foresight or hindsight if you want to argue, but a long-term view of the Investment Process eliminates guesswork and points pretty clearly toward a trading mentality that takes advantage of the natural volatility of hundreds of Investment Grade Equities. Think about these simple facts during corrections: 1) Even though there are more sellers than buyers, the buyers want to make money on their purchases. 2) As long as everything is going down, don't worry too much about the price of individual holdings. 3) Fast and steep corrections are better than slow ones. 4) Accept even half of your normal profit target while buying opportunities are plentiful. 5) Don't rush to fill your portfolio, but if you run out of cash before the time is up, you're doing it "right." Most of the problems with mutual funds and a lot of the new opportunities in individual stock trading are caused by the fact that more people are buying and selling stocks without being professionals. Everyone is in the stock market these days, whether they like it or not. When the media stirs up the emotions of the masses, the masses create volatility that rarely under-reacts to market conditions! Unit owners rarely take profits, especially if they have to pay taxes or fees to do so. Expert advisors who tell investors to move into the market when prices are going down are even more unusual. Every change in a volatile market creates a chance to make money, but you have to be willing to trade to get the benefits. The first thing you need to do is realise that both "up" and "down" markets are natural forces with a lot of potential. If you treat the second one right, it will make you appreciate the first one much more. In order to be in the right place at the right time, most investment strategies need answers to questions that don't have answers. Mamma doesn't like it when you can't make up your mind. She doesn't care if you come in or leave too soon. But people who waste the chances she gives them really irritate her. To make good investments, you need to know how the forces of nature work and follow the rules of portfolio management. If you can switch back to individual securities, you will move closer to your goals most of the time, because opportunities are out there all the time. So let's change the rules of this investment game for a while and get used to them: Let's buy both new and old good stocks when their prices go down. Let's make some money off of those whose prices go up, when they are kind enough to do so. For a change of pace, let's look at how well we did based on the results of these trading transactions alone and at different points in the market cycle. And there's one more thing... Let's raise a glass to Mother Nature's unpredictability and volatility, as well as to our first loves.
