I wish I could remember how many times in the 20 years Ive been investing in shares that Ive heard someone say something like The trouble with investing for the long term is that it commits you to investing during downturns, too. Its an obvious truism, but what are these people suggesting as an alternative?
In effect, what theyre really saying is: The best strategy is to only buy shares that are going to go up in the short term, and never buy ones that will go down! Well, thats about as much use as Monty Pythons famous lesson on how to play the flute: You blow in the hole and move your fingers up and down the outside.
Its really pretty obvious that if you only invest in short-term rises in the market, and sell ahead of all the short-term falls, youll wipe the floor with all those long-term investors out there.
But for that to be an even remotely practical strategy, just like needing to know exactly how to finger your wind instrument, youd need to know how to tell when the short-term ups and downs are going to happen.
And never in the long history of stock markets has anyone ever come close to working out how to do that. Its obvious really, if you think about it. If its possible to tell today that a share is going to start falling tomorrow, then everybody will have worked it out yesterday and the price will already be on its way down today. And if yesterday they could tell it was going to go down today, theyd have worked it out the day before and
Where did they go?
Extrapolated to the long term, if we could tell when the ups and downs were going to happen, by buying and selling that much earlier wed stop them happening and the stock markets progress would be a lot smoother and steadier over the long term than it actually is.
If we need more evidence that the stock market cannot be called in the short term, we really only need to look at the great investors Benjamin Graham, Warren Buffett, Peter Lynch,David Dreman, Neil Woodford How many of them owe their success to their ability to call the market and time it right for getting in and out when the short-term ups and downs come along? The answer is none. How many achieved great wealth by buying good quality companies and holding them for the long term? Every single one of them.
Money, meet mouth
Do you reckon you can do better than these greats? No? Do you know any way of only buying shares when theyre about to go up and never buying ones that are about to go down? No? Well dont bother me with your The trouble with investing for the long term nonsense then. And dont tell me how to play the flute until you can delight me with Bachs Partita in A minor.
The simple truth is that if we are not able to time the market and we are not then the only thing that makes sense is to analyse individual companies and buy the ones that look like good value with a long-term horizon.
Dont forget to tune in next week, when Ill tell you how to cure the world of all known diseases.
In the meantime, you could do a lot worse than checking up on a strategy that can bring great long-term rewards.
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