Jim Rohrbach: Why Investors Buy High and Sell Low

My friend Jim Rohrbach sent me an article he recently authored:

I talk to a lot of people about investing. Many of them are afraid to invest. I don’t think they recognize their fears, but the longer they talk the more I recognize the fears that are not obvious to them. I had a few of those conversations this week. One was from an existing subscriber and one was from  a potential subscriber who has called me on several occasions. At the end on each of the calls from the potential subscriber he tells me that he understands the importance of my service, and that he is going to subscribe. But, he never does. The other conversation is with a current subscriber who did not get in the market even though he knows that the RIX has been on Buy Signals for almost all of the time since the March 9 lows.

What are the common threads in these  conversations? Well the same ideas apply to most investors who can’t pull the trigger on up trends and down trends. When the markets hit their lows in early March, all we heard was that the markets were going much lower and we were going into a depression like the one that happened in the 1930’s. So that creates the fear that “if I get in now the market will go down, so I will wait so I don’t lose money”. It doesn’t matter to these people that the trend of the market turns up. They are afraid of losing money, so they stay on the sidelines.

Another fear happens when the trend of the market starts down. Many investor want to keep their recent profits. They are sure that the markets will go back to their recent highs so they stay too long because they are convinced that “if I sell now the market will turn around and go back up”. So they stay and stay until their losses get so big that they make the decision to ride it out. In bear markets, fortunes are lost waiting for the market to go back up.

Another fear occurs when the market continues up. Those who did not get in are afraid to get in because they are sure that if they get in, the market will turn down and they will lose money. So they wait for a pullback, that may not come. If the big pullback does come, these same people will become afraid again and will not get in even though they are given a second chance. Fear controls their decisions, so they can’t make a move. They eventually join the “Buy and Hold Crowd” and ride out all market up and down moves. They become “Sitting Bulls”.

If investors base their investment decisions on emotions and fears, they will probably be unsuccessful. When investors decide in advance where they think the market, or their investment vehicle, is going to go they will tend to look for indicators to support that decision. They have a strong need to be correct even while their financial world is collapsing.

I Have Heard It All

A Turtle who bombed big time over the 20 years since Dennis disbanded the Turtle program now is pumping the idea that trading is once again genetic and not about systems — all the while pretending to be a tremendous trading success. At first blush this all appears to be a lengthy rationalization for documented failures. Stay tuned. I will obviously have more to say in response.

Note: In a general sense I am amazed at Wall Street. Does anyone out there do any due diligence or does it just make people feel good to act surprised when a Madoff or Stanford appear on the scene?

Up and Down, But Mostly Up Recently

From Yahoo today:

Investors had hoped that FedEx’ raising of its guidance in early December for its fiscal second quarter meant a more thoroughgoing economic recovery than the company described in its results on Thursday, said Edward Jones analyst Dan Ortwerth. “The market had decided this meant the economy was going gangbusters. Then out comes the details. The economy is improving but it’s still on shaky ground. So the stock is back to where it was before the pre-announcement,” Ortwerth said. “It’s almost comical. The price goes up, the price goes down.”

Dan, my friend, since when did volatility become abnormal? That little paragraph is such a great microcosm of the insanity of trying to use news and fundamentals to guess market direction.

Donchian: Forbes Circa 1982

An excerpt from Forbes circa 1982:

The fundamentalists — a decided majority among successful investors — look on chartism somewhat the way physicists look on parapsychology. They are probably correct to regard them so, but there is no rule that does not have an exception. Dick Donchian seems to be that exception. Donchian differs from many a chart watcher: He doesn’t predict price movements, he just follows them. His explanation for his success is simple and as old as the Dow Theory itself: “Trends persist.” He will buy a hog or Treasury bond future after an upswing is under way, and sell it only after the price has begun to tumble. He misses some of the profit, but that’s part of the discipline of his style of investing. “A lot of people say things like: ‘Gold has got to come down. It went up too fast.’ That’s why 85% of commodities investors lose money,” he says. Donchian gained that wisdom the hard way. His Futures Inc., the first publicly offered commodities fund, came out in 1948 at $10 a share. It was before its time — or Donchian’s. “When I started trading I was bearish,” he recalls. “Cocoa seemed too high. So we took a short position at 30 cents, and it went down to 19. We made a lot of money at first; that was the worst thing that could happen. I looked around for another commodity that was overvalued. Coffee was making a new high of 20 cents, so we took a short position, and it went up to $1. I made a rule never to be a price trader. There’s no such thing as too high a price or too low a price.” Futures Inc. went as low as 4 cents a share before finally being dissolved…The essence of trend-following, however, is always this: Buy on a rising price and sell on a falling price. That sounds like buying dear and selling cheap, but it works, if prices move not in random walks but in long strides.