Monday, October 25, 2010

Trend followers are like shopkeepers

A shopkeeper's lifeblood is his stock. If he finds an item that generates a healthy profit, he would want to keep buying and holding more of the same item, until such time where he no longer makes any money on that item. At that point he gets rid of any stock he still holds, freeing up his precious capital, and looks for something else to buy in its place, with the potential to make money. Why would he want to stock up or keep holding onto dud items he can't sell for a profit, cluttering up his shop? It also makes no sense to buy something that won't generate profit and income in the near future.

Your first loss is your best loss.

Firstly, think of the above from the perspective of someone who trend follows when buying stocks.

Now think from the view of a Japanese buy and hold investor who bought stocks in the early 1980's, when the Nikkei was at 10,000 and has held on up to now, or a US investor who bought Enron shares at $20 in early 1997 and then held on.

Even worse, think of someone who bought Japanese stocks in early 1990 when the Nikkei was at 40,000 and held on, or someone who bought Enron shares at $90 in early 2000.

Two extreme examples I know, but hopefully you get where I'm coming from - and if you don't, go find a historical chart.

No comments:

Post a comment