Being long the stock market is certainly paying off. In fact, it’s been paying off quite handsomely since the financial crisis low set in March 2009. Of course, the stock market is still in recovery mode. Share prices still aren’t back to their highs set over a decade ago. They’re getting closer, but, really, we’re only talking about breaking even. If it weren’t for dividends, most equity investors would have been in the red over the last 10 years.
There are two extremely important things that make all the difference for the equity investor. Time and timing.
For example, over time, PepsiCo, Inc. (NYSE/PEP) has been an outstanding wealth creator for shareholders, especially if you reinvested those dividends. But, the great returns didn’t come overnight; they took decades.
The timing aspect of successful equity investing is obvious. The single most difficult thing to accomplish well is the successful timing of purchasing and selling your stocks. Good timing is everything in the stock market, but most people don’t have the discipline to wait for pricing extremes to present themselves. Most people just invest money when they come into some (that’s why stockbrokers stay in business!). Really, you don’t need to speculate on high flyers in the stock market. If you can time the broader market effectively, you can make a boatload of money just buying and selling the index. Investors like to bet on companies, but maybe they should focus more on betting on the market.
I’ve always been a big fan of exchange-traded funds (ETFs) and the simple concept they represent. Recent history illustrates that an investor could do very well buying the stock market when it’s low and selling the stock market when it’s high—just like in real estate. It does take courage to take on positions when everything is coming apart, and it also takes courage to cash out when everything is booming. But over the last 10 years, this kind of trading would have been very profitable, because the extremes were so large.
I think the stock market is in an upward trend that will soon become another extreme. I can’t escape this gut feeling that the market is experiencing some kind of last hurrah. It’s just instinct, but it’s worked for me in the past.
Anyway, long-term investing has proven to be successful, but the key with this strategy seems to be loooooooong-term. Timing the stock market is difficult, but, then again, so is picking winning stocks on a consistent basis. A very worthy investment strategy going forward might be to just wait for price extremes in the stock market (using a benchmark like the S&P 500 Index), then seek to go the other way. The right shoulder in the S&P 500 is forming itself right now. If you don’t need to be playing, I think this kind of investing strategy is the way to go. Anyone ready to go short? Not quite yet, but soon.