Dear Member,

A few years ago Davis Advisors released a study about the returns for average investors compared to advertised returns from mutual fund companies.

The mutual fund industry was advertising a 9.9% annualized return from 1991 to 2010. However, the average investor really only saw a 3.8% return. Why? Well, they called it the “investor behavior penalty.”

Investors in mutual funds were trying to time the market and it wasn’t working for them at all. Since their emotions were driving their trading decisions, the strategy they used turned into buy high and sell low.

Morningstar did a similar study, the results were even worse, 12.01% mutual fund return over 6 years, resulted into an actual return of just 2.2% for investors.

Timing the market is a fool’s mission, which is why we recommend owning investments that are sound and will profit from large macro-economic trends that are unstoppable.

Ibottson Associates reported that a dollar invested in the stock market in 1926 was worth $1,114 by 1995. However, if you took out the best 35 months, your dollar would be worth just $10. Think about that, out of 828 months, 35 of those months were the difference between having an investment that went up 1,000% over nearly 70 years or seeing your investment gain over 111,300%!

Market Timing May not even be worth it…

As Jeremy Siegel’s research points out, even selling 1 month after each peak since WWII and buying 1 month after each bottom, you would have actually seen about a 0.6% less of an annual return versus just staying put.

My Own Broken Crystal Ball

In March of 2008, I forecasted the collapse of Lehman Brothers, Washington Mutual, and AIG. In that same video, I also forecasted Dow 8,000 sometime in the fall of 2008!

I could not have been more right, but within a year, I was calling for another crash. This time, due to the real underlying problems in our economy, I thought Dow 3,000 was in our very near future. Of course Dow 3,000 never happened, what did happen was QE-forever and the Federal Reserve openly participating the inflation of stocks. I was wrong and my attempt to time the market caused me to miss out on a lot of gains.

The lesson I learned was to focus on long term value, buying good businesses, and positioning myself during market extremes rather then try and time the next market crash or rally. Focus on value and give the sectors you are in an honest evaluation.

Warren Buffet’s Buy & Hold Vs. The Average Investor

My issue with buy and hold is that for most it also means to buy at any price. If you are going to buy and hold, treat your investments like Warren Buffet.
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  • Buy sound businesses that virtually have no capital risk, meaning these businesses will be around in 100 years.
  • Buy when these businesses are undervalued.
  • Buy with the assumption that the stock market could close down for 5 years.

Realizing that you are buying a business will also help. I’ve never heard of any investment outside of the stock market where someone buys a business or rental property only to sell it a few hours later because the “market” was only willing to re-buy it for 90% of what you paid earlier that day.

So my message is this, “buy and hold” can work and will work if you allow it to.

Best Regards,
Daniel Ameduri