I want to start this article, by explaining what I mean by dead. The stock market is no longer what it was. Long term investing is dead. By and hold are dead. It is my opinion, that only a very sophisticated investor can make money in the market now. The problem is that brokerage house’s keep telling everyone that the old days will come back.
I received a direct mail piece from a brokerage company last week and it took me back to the old day’s. I used to be a stock broker and one day I started to wonder about our marketing. Why did we only show the performance of the stock market from 1980 to 1999? The piece I received last week, did the same thing. It’s 2010! Why not show the performance for the last 10 years?
The reason is that the Dow Jones Industrial Average grew by 13.99% year over year during that period. This growth rate historically was off the charts!
What is the average return of the Dow historically you ask?
From 1897 thru 2003 the Dow grew by only 5.16% before fees! In fact the return of the market from 1897 thru 1980 is but 3.73%, which is approximately the average rate of inflation. The real rate of inflation, not the made up inflation number the government now uses.
I have the chart’s to prove all of this below. I used this time period (1897-2003), for a couple of reason’s:
Click the chart below and then zoom in to see the whole story of the Dow Jone’s Industrial Average.
I think this pretty much kill’s the idea of long term investing. The market has done nothing for 10 year’s.
Broker’s Know How to Make Money Right?
Major brokerage companies cannot consistently even beat the long term returns of the Dow Jones Industrial. Want some proof to back that up? Here again are stat’s based off of performance from 1993 to 2003 instead of the current mess. They couldn’t make money back then either. (Note: For fund’s that didn’t exist in 1993, I provide since inception result’s)
This information is almost un-believeable. Remember, these number’s are even worse today. To break this down, these mutual fund return’s were provided on a 10 year or a from inception return. Here is how they performed:
Even the supposed best mind’s on Wall Street being Goldman Sach’s gave their wealthy customer’s bad advice 77% of the time. Bloomber recently reported “Seven of the investment bank’s nine recommended top trades for 2010 have been money losers for investors who adopted the New York-based firm’s advice!”
Investing in the Past
When I was a broker, I was taught by some very wise older broker’s how to invest in the stock market. You have no doubt heard of Asset Allocation. Asset Allocation is nonsense! It is based off of the real way to invest, which is called Covariance Analysis.
Through Covariance Analysis, you create efficient portfolio’s made up of stock’s, bond’s and short selling, for risk aversion. The ultimate goal being, to create a portfolio of investment’s that provide the greatest return at the lowest risk.
Here is a brief example. Let’s say you own Hershey stock. You notice that when Hershey falls in value, sugar rises in value on average. If you added sugar to your portfolio, you would then lower your overall risk level. This would be a more efficient portfolio.
Now imagine if you did this by looking at how all investment product’s perform. You could create the ultimate efficient portfolio! One hedge fund actually did just this for many years producing average return’s of 19%, with not a single loss sense inception. They were called NWQ. They were bought by Goldman a few year’s back.
The New Way, Sorry you Can’t Do This
Well that was the old way to invest. It still would work much better than how most people invest today, but from what I’m seeing there is a much more profitable way. It seems to be legal to front run? Front running is when you know someone is planning on making a big investment, so you buy in ahead of them and then sell at the inflated price soon after.
Also, we are aware of how derivative’s have been used to buy insurance on the soon to be dead. If you want to learn how derivative’s and swap’s work, read my article What are Derivative’s & Swap’s.
Why Did the Market Go Up in the 1980’s
Your probably wondering why I have waited so long to talk about this. So, that I don’t turn this into a political blog I’ll just say two word’s: Political Reason’s! Both Democrat’s and Republican’s are at fault in my opinion.
That’s All Folk’s
If you have any question’s leave them in the comment section below. I made this article, because I received request’s for more article’s on investing. I’m working on a Efficient Portfolio article as we speak! It should be fun.
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