John Lefferts' Blog

Friday, June 5, 2009

The Village Idiot

A joke that has given me a chuckle over the years goes like this. A mob guy visits the village idiot on his regular "milk run" of extortion. He meets him in his driveway and says, "Hey idiot, pay me the money you owe me". Idiot says "I no pay!". The Mob guy is visibly agitated and asks again, "I'm telling you one last time, if you don't pay me the money, I'll knock the bejeebers out of your car over there with this baseball bat". The village idiot says again, "I no pay the money!". So, the mob guy draws a circle in the driveway. He says "Idiot, I want you to get in this circle while I destroy your car and if you so much as even think about stepping out, 'll destroy you too!". So the idiot stepped into the circle and mob guy proceeds to start bashing the car to bits. Taking a short break in between swings of the bat, the mob guy looks over at the idiot expecting him to be devastated watching his car being destroyed, but the idiot is laughing out loud hysterically. Confused, the mob guy walks over to the circle and says, "Hey Idiot, I am destroying your car and here you are laughing uncontrollably. What gives?". The Idiot says, trying to speak through his laugh, "While you were over there, hee-hee-haw-haw...I stepped out of the circle 3 times!

Okay, maybe it isn't the funniest joke you've ever heard, but it illustrates a point I want to make. It's very much in vogue to say that buy and hold investing is dead and a new era of a traders market has begun. At least that's what the traders lead you to believe. But those of us in the financial services business know better. The universe of traders in the overall individual investing community are miniscule. And even for the pro's in the business doing it full time, few if any can effectively time the market which is basically what traders attempt to do. The poor investor who had enough of the market volatility in March and cashed out at the lows is now being told by the traders (Jim Cramer/TD Ameritrade, etc) that now is time to buy stocks only to be told to jump out the next day, then back in and so on. So not only did these poor saps lock in a loss when they sold out, but they're jumping on a band wagon of trading that is a sure bet to lose even more money. All the time, those who had the advice from a professional financial advisor who placed their clients in a diversified portfolio using asset allocation predicated on their time horizon and taste for risk...have ridden the markets back up.

Buy and hold is not dead, which brings me to the joke above. I liken the traders to the village idiot and the car to their nest egg. While they're having fun trading (i.e. stepping out of the circle 3X) their nest eggs are being destroyed just like the car. But they won't realize it until it's too late. They'll keep laughing and trading not even realizing the damage being done to their assets.

It's been proven over many decades and generations that trading for most people is a fool's errand. Don't be a village idiot!

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