I read with interest Mr. Potter's article titled "New Investment
Kid" in last week's <MI>Valley Reporter<D>. I can only hope
that anyone who read his article got serious advice before buying into
his "double short" strategy. The bet here is that oil will continue to
fall in price. If you are in this, you better stay close to your
keyboard because if oil turns your losses will be spectacular. If you
look at the stock market as an alternative to a casino, that is,
somewhere to place your bets (as he so eloquently describes it), then
Mr. Potter's strategy will save you a trip to Montreal. Good luck
guessing whether to place your chips on black or red though --
thousands of really smart people managing hedge funds have lost
billions this year on the same types of bets that Mr. Potter is
describing.
OWNERSHIP STAKE
Mr. Potter enthusiastically denigrates "buy and hold" investing, but
perhaps because he's lost sight of what investing truly means and the
appropriate time horizon over which to assess its efficiency. When you
buy shares of stock in General Electric or Apple, you're not betting
that the share price is going to go up; you're taking an ownership
stake in companies that are well managed, profitable and growing
enterprises. In tough economic times like today, of course, their
profits are going to suffer for a period. But does anyone really think
General Electric and Apple are going away? Do you doubt that those
companies are going to be even bigger in 10 years than they are today?
Does it sound like a good idea to own pieces of these in your long-term
savings?
It's been said that in the short run, the stock market is a voting
booth, while over the long run it's a weighing machine. What that
attempts to convey is that over stretches of time, investors' emotions
can overrule reality -- both in pushing stocks too high (1999) and
driving stocks too low (now) relative to the true value of a company.
Over the long run though, it's far better to own small pieces of great
companies that will flourish as the American economy recovers, which it
always has and always will!
REAL-LIFE EXAMPLE
Let's look at a real-life example. The S&P 500 Index is down over
40 percent this year. What a horrible, horrible investment, right?
Well, if you had the courage to invest $1,000 in it during the terrible
recession in 1981, reinvested all your dividends and capital gains and,
most importantly, were brave enough to hold it through the recessions
of 1990-1991 and 2001-2003, and today (even though it's down over 40
percent this year!) that $1,000 would be worth over $12,800! Does this
sound like the returns of Potter's: "...'buy and hold' nonsense that
wants you to stand by while you go broke..."
The real lesson to remember truly is "...don't confuse short-term speculation with long- term investing..."
Jim Adams is a financial advisor with Long Trail Financial in Waitsfield.
