"The market" rebounded today by posting a 112 point gain after yesterday’s 389 point slide. If I were a gambling man, which I’m not, I would have bet it would have dropped another 125 points today. My friend Bobby had his money on a 60 point gain. (Yeah I wrote the book – but he read it :-)
We all get surprised in life. Every expert, every investor, every person, can get surprised – especially on a day-in and day-out basis (ask Jim Cramer, it happens to him all the time.) That’s why stock trading is for gamblers and addicts alike. But that’s not investment.
Investment is long term. With investment, logic determines success. With gambling, logic helps but isn’t necessary – to be successful you must be lucky. Investing requires no such luck. Understanding is all that is needed.
This Wall Street Journal headline caught me by surprise today from the moment I saw it. It was the cause to today’s stock market gain if there was one.
Economists See Smaller Chance of U.S. Recession (by Phil Izzo)
It was a panel of 52 economists that "put 1-in-4 odds that the U.S. will experience a recession
in the next 12 months, down from 1-in-3 chance they were seeing just two months ago."
I bet this panel of economists is also fond of casinos and horse races. Their jargon sounds more like a gambling ring than an investment circle.
Gambling is short term. With investment a long term view begins with a 3 to 5 year perspective; 10 years is best. Focusing on short term news and daily moves only brings more emotion and luck into the equation for success. It turns investment into gambling. Why go there?
My friend Billy once said, "You know, the moment you put the words billion or trillion behind a number it seems like most people lose all conception of numbers."
Taking his message to heart, let’s try it this way:
Right now, the U.S. government has $2 of income per year but spends
$4. As a result, it must borrow $2 per year to cover its irresponsible spending habit. Now, everybody knows the government can’t keep spending twice the amount it takes in. It’ll go bankrupt if it does, and that will look like Europe right now.
Also at the current time, the United States has $15 of economic activity and $15 of national debt. That is to say that the U.S. is 100% leveraged. Greece and Italy fell into hell around 120%. This doesn’t give the U.S. much room left before calamity strikes here again.
So the U.S. government must curb its spending habit. And the moment spending drops from $4 to $3 the economy will have no choice but to fall into recession – and then the stock market will dramatically sell off.
This will happen. Whether it occurs in the next 12 months or 2 years doesn’t matter to the long term investor. The real money is to be made by buying low (then it’s easy to sell high.) To do that, you need cash and a plan of attack for when stocks go on sale at discounted prices. Use my 15-51 portfolio builder
to prepare that plan and schedule a workshop
if you need help with it.
And leave the luck for the gamblers. They really need it.