How I Will Be Rich

It seems like every single blog that I’ve visited in the last week or so has at least one post about what is going on in the stock market and what you, as an investor, should do. I’ve read so much different advice and theories over the last week or so and everything is so contradicting. One article I read claims that everyone should pull all their investments until the market turns around, another article claims that you should start shorting everything, and another states that you should just hold out.

To tell you the truth, I have no idea what the best move is right now. Personally, I look at indicators that help me figure out the right time to get in to the market. The hard part is finding the indicators of when to get out of the market. Lately, I’m a fan of the third option. I like to go long with my stocks. Markets are cyclical and in the long term, the current drop off in the market will be merely a blip on your overall stock chart. Just for the hell of it though, I’m going to look at all three of these ideas.

1. Pull all your money from the market and hold cash. The idea is that you can pull all the money you have invested in the stock market and put it in a savings account and earn about 5% a year. This is not a bad idea but what if you are sitting on a loss. The market is a crazy animal and can turn around out of nowhere. I just don’t like the idea of not holding on to investments just because we have a little downturn in the market. I will be kicking myself if the market turns and I wasn’t along for the ride.
2. Start Shorting Everything. This idea is risky but it made a lot of people rich in the tech bubble burst. The idea is that you start borrowing shares of stocks at that current price and if the stock drops further, you profit off it. You are basically borrowing shares from someone at the current price and when the market drops further you cover your position by buying shares of that stock at the lower price. It is something that is hard to explain but in this strategy you are basically shooting to buy high, sell low. The reason this is risky is the potential for loss is unlimited. With a regular stock purchase, the absolute most you can lose is the amount of your initial investment. With a short sell, there is no limit to how much you can lose. If you buy at one point and the stock turns around and starts increasing in price, there is no limit to how high it can go.
3. Hold out. Long term investors tend to ignore markets like the one we are having right now. They pick good companies that they are confident in and hold them for years and years. If you have a good grasp of the fundamentals and you have done all your homework, there should be no reason for your stocks not to turn around when the rest of the market turns around.

Of course the best strategy would have been to sell everything three weeks ago when the market peaked, short sell for the last three weeks and reinvest when the market hits it’s lowest point but I don’t know anyone who’s that good at market timing. I guess hindsight is 20/20.

On an up note, Stocks are up today due to the fed. cutting the discount rate. Hopefully they will continue in that direction and everyone will start wondering what the heck they were getting so uppity about anyway…

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