Buy & Hold
Scenario #1: The Aussie Dollar falls below 0.6000. My high-school friend tells me, months after the event and after it had risen back to 0.7500+, that he knew he should have bought it then, because obviously it was going to go higher. He was kicking himself.
Scenario #2: Australia's biggest telco - Telstra - is hitting record lows at the moment. The thing is that it's ~51% owned by the Australian government, who want to sell. Selling it now would be too cheap, so they should really hang back. But doing so keeps the price low, because they could drop billions of shares on the market at any time and flood the market. My Dad tells me that now would be a good time to buy Telstra shares.
The question I have to ask is, okay, but when would you sell it?
AUDUSD hit a low of ~0.4800 before rising back up to 0.7500. If my high-school friend had bought at 0.6000, he would have had to suffer through a loss of some 1200 pips before it finally swung back. If he had bought 1 contract, that's $12K. He used to work as an English teach in Japan, so $12K is a pretty big deal for him.
And there is where Buy & Hold falls down. The risk. You don't know it. By definition, Buy & Hold means you have to risk 100% of your money. You don't care about the losses (right?) because eventually that's going to turn around and go into a huge profit (right?).
Dollar-cost-averaging has the same problem. It works great, as long as the price eventually rises above where you originally bought. But if that price keeps going down and down and down, then really all you're doing is giving other people a chance to sell their stake. At your expense.
I don't mind long-term investing. I'm just saying use a stop loss. A point where you are prepared to say "yep, got that one wrong", you sell for a loss, and move on.
My other piece of advice is to not try and pick bottoms. Don't buy on the way down because you think it's cheap. It could well get a lot cheaper. Wait for the turn around. It might cost you a little in terms of profit, but you'll have more confidence going into the trade, and probably more chance of coming out ahead.
So, no Telstra shares for me just yet :-)
3 Comments:
It's the perception of value thing, anchoring bias to the glory days for TLS and it's share price.
If I had a choice between the 'value' of TLS or the scary new highs being formed pretty regulary by BHP, RIO and WPL then for me it's not a difficult choice.
It's more Buy and Hope when you don't have an exit/re-entry component to your strategy.
We all have those great contrarian indicators we can fade in our circle of friends I think :)
Cheers,
Andrew
Hi Andrew.
Any thoughts on what the govt should do with its remaining shares?
If they sell now, I think they're doing the taxpayers a disservice by selling too cheap.
If they hold, prices will remain low because they could flood the market with new shares at any time.
Option #3, thanks to a letter-to-the-editor I read: buy-back. Sell when prices go higher. This one sounds good to me. Unfortunately it would then seem like the govt was profiteering from the financial suffering of Mum & Dad investors.
It's a tough one.
You would think that being the government they are more likely to get it wrong than right as well :)
For private investors all I know is that you are correct about picking bottoms, there are numerous other more profitable and easier games to be playing in the markets.
Cheers,
Andrew
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