By Al Thomas
I have watched my cat play with a bag of catnip. At first he is having fun and slowly he becomes drunk with pleasure and then finally he becomes so tipsy he falls over to sleep it off. The pleasure part is great, but I am not sure if he awakes without a hangover.
Ryan (thatís his name) reminds me of a one of those people who buy a stock and holds it. At first while it is going up there is great pleasure and then euphoria until they know they are market geniuses. Olay some more. Thatís the drunken stage. Finally when the market turns against them they fall over not having enough sense to quit (sell or put in a stop loss order) and later when realization returns they have a huge hangover (called hindsight) Ė and no money.
Can these 4-footed animals teach us 2-footed beasts anything? Can we be smart enough to quit while we are ahead? Ryan (and his friends) continue to make the same error over and over. Us 2-footers are supposed to be smarter; however, we can learn from their misconduct.
If you own stocks, ETFs and/or mutual funds and the market is going up it is super catnip and we keep buying knowing that somewhere over the rainbow we are going to be rich and retire like kings. My broker told me so. Almost none of todayís investors ever think about selling. Wall Street tells us to buy and hold. They donít want you to sell because if you do they quit making money. Brokers make nothing on money market accounts.
Donít worry about a break in the market it always comes back. That is what all brokers preach. That is their catnip; their promise of better times ahead (with no plan to protect your cash when it doesnít). Taking that catnip promise away investors might sober up and get rid of those losing equities.
The great mother of all stocks, AT&T, well, it used to be, has dropped from $100/share to $14. What are those widows and orphans eating for supper now? Not steak. Maybe cat food.
When your equities are no longer rising and are declining it is time to exit those positions. Give up the catnip. When the trend stops its upward angle it is time to sell. Of all methods of investing the safest and most reliable is trend following. It is the catnip on the way up, but when the trend starts to decline you realize you are one smart cat. You are sober and walk away (sell).
You have the catnip for another day.
Copyright 2013 Williamsburg Investment Co. All rights reserved. Al's new ebook (32 pages) is available on Amazon.com for 99 cents. It explains the Golden Cross and the Death Cross. These are well known methods of determining long term trends in the market. If you only learn one method of technical analysis this would have kept you out of the 2000 and 2008 crashes and will keep you out of the next one that is coming soon. The title is Never Lose Money In The Stock Market Again.