The Easy Way to Invest
Long term investing is really the best and easiest way to invest. You just keep putting money into the market as you get it, and over time you discover that it has turned into a rather decent amount. You can buy a good no-load mutual fund or try your skill at selecting individual companies to invest in. And then you just wait, counting on the fact that the long term trend of U.S. stock market has been up from the beginning.
The History of Long Term Investing
The New York Stock Exchange was founded on March 8, 1817, so it is close to 200 years old, and shares have been going up ever since. There is a reason for this, which is that shares appreciate when companies are productive and make money, and generally that is what happens. Generally. On average.
Of course, stock prices didn’t go up in a straight line. There was the Panic of 1819, the Panic of 1837, the Panic of 1857, the Panic of 1873, the Panic of 1893 and so on right through the Great Depression and up to the Great Recession of 2008.
The Problems With Long Term Investing
You see, there are two problems with long term investing.
First, it’s long term. That would be all right but, as a rule, people don’t have all that much time to invest. As Keynes famously said, “In the long run we are all dead.”
Second, it isn’t straight up. So even if you have a fairly lengthy horizon – 10 or 30 years, maybe to retirement – you might buy in at the top and wait for many years just to get even.
What an investor needs is some way to know, “This is a pretty good time to get in” and also, “This is a pretty good time to get out.” Doing that is called “market timing,” and Bumblebee Investing is dedicated to coming up with those market times.
Trading the Market Indices
Let’s look at how Bumblebee tries to do that.
The way I use the term, “investing” (as opposed to “trading”) means putting up money or other assets with the idea that it will be used to create a product that can be sold and generate a return to you, the investor, as a reward for putting the money up in the first place. Why you deserve a reward is that you took the chance – risk – that you would lose some or all of the money you invested.
The reward you get is money. The money you get is in the form of dividends and of the increased value of your shares if and when you decide to sell them. Where do dividends come from? From profits. What makes your shares more valuable in the future? The profits that are not distributed as dividends but are reinvested – profitably – by the firm.
Stock analysts try to determine what a company’s shares are worth so as to know whether the price they are currently trading at is a “good buy” or otherwise. Though the analysis can be very complicated, what the analysts are always trying to figure out is simply how profitable is company XYZ now and in the future. If you know what a company is earning now and what it would earn at any time in the future, there is nothing else necessary so far as investing is concerned.
At Bumblebee Investing I am not particularly interested in the present and future profits of individual companies. That is really hard to figure out for any one company, let alone hundreds and thousands of them, and there are people who are much better at it than I am. Fortunately, it is possible to invest without analyzing any one company. Instead, we can invest in all of them at the same time.
The way you do that is by buying shares of a mutual fund that follows the market up an down, or by investing in an index Exchange Traded Fund (ETF) for the S&P 500 Index, the Dow Jones Industrial Average, or the Nasdaq Composite Index, or by trading the corresponding index futures.
And it turns out that investing this way makes market timing much easier.
What happens with a major stock index is that the uncertainties associated with individual tend to cancel out, leaving you with a representation of the direction of the overall market. And while it is quite difficult to correctly evaluate individual companies, the direction of the whole market can be predicted with some accuracy.
This is because individual companies operate inside of the general economy. If the economy is good, companies (as a whole) make profits. If the economy is bad, companies make much less profit or even go out of business. Therefore, the stock indices will follow the economy.
It is often noted that the stock market commonly signals recessions by turning down. This is because the market is sensitive to the state of the economy. But the market, because of the various psychological factors of traders, lags behind the economy a little. It is always waiting for confirmation.
Many years of very short term trading have convinced me that profits are made by not waiting for confirmations. So while the market waits for confirmation in the economy, the Bumblebee Investor gets out near the top and in near the bottom on the basis of early signs. If the call is wrong, well, you just reverse your position with a small loss — sometimes that happens, but it’s just part of the game. The small losses are offset by the much bigger profits when you are right.