Remember, 7% growth is higher than the growth of GDP BECAUSE the Dow is made of components which, on average, GROW FASTER than the GDP since they are the mainstays of the economy. These the best companies in the US, in theory.
So, today, it’s fair to say that even with government intervention these companies are likely to continue being the best (until they are replaced with other firms in the index).

The other fallacy at work today is that companies like Citi and GE and others are “not profitable”. This depends on how you’re viewing profits. From a strictly operational standpoint, they are very profitable. The issue isn’t day to day operations which is causing them problems. It is their asset base, which is eroding. Since markets for CDOs and other estate based holdings have evaporated, valuing these things is very difficult. Thus, the “mark to market” rule is forcing all the companies to price down their values of their portfolios, which means their operational profits are being wiped out by losses in asset value. This puts their capital base at risk AND creates imbalance on their balance sheets that require capital infusions above and beyond their profits. Not a very steady place to be, if this were to keep happening over the long haul.

However, lots of companies are very profitable AND still have strong balance sheets. They are not doing anything yet because they are waiting to see how things sort out – but when things DO sort out, they will be buying with a vengeance, and on the cheap. THUS, the markets will move again, upward, in a very violent fashion. I would not be surprised to see the Dow at 10,000 in a year, or possibly 2. If this happens (and I really think it will) this means annualized gains of 21 and 17% over the next 2 years! If you’re not in the market now, you will get none of this. You could enter when you feel more comfortable, say when the Dow gets back to 8,000 – but the Dow was at 8,000 not too long ago and you didn’t get back in then…..so you’re unlikely to do it at 8,000. Chances are you’re likely to wait until 9,000.

The point remains – being out means you may have saved something from the current downdraft – but it means you’re likely to miss a huge part of the nascent updraft. Buy and Hold rules the day….but you do have to remember to occasionally take something off the table during the good times.

One, if you have seen an incredible run-up to the point that the PE ratio simply seems ridiculous, then sell at least some of your position. Nothing wrong with locking in a profit; you pay your taxes, keep the rest of it, and get on with life. Generally this kind of obvious distortion is more applicable to individual stocks, but in 1999 it was starting to get obvious for the entire NASDAQ index. There were some excellent companies, but in many cases companies had PE ratios of 500 and more. Simple math suggested that unless, e.g., Amazon.com were within a decade to earn a profit adding up to greater than the value of the entire US economy, this PE ratio was way too high. In such cases, if you’re long you sell and take your profit; if you don’t have a position then you wish “congratulations” to those who do, and wait for another opportunity to come along. It was pretty obvious to a lot of people that the entire NASDAQ index was over-valued at that point, and I know someone who thought it overvalued at 3300, sold his index and took his profit, endured a bit of teasing as the index quickly worked its way up to 5000… but then watched as it dropped hard below 2000 and, if memory serves, it has never come close to 3300 since. So he left some profit on the table– so what? He sold because a) it was obviously overvalued, and b) it was impossible to predict when other people would recognize the obvious. (There’s also nothing wrong with selling to cut your losses, if it becomes clear that a company has taken on too much debt or if it otherwise seems to have lost its way).

Two, the buy and hold strategy works only with the assumption that new money is constantly going in. Which, of course, it should be. Indeed, those who criticize “buy and hold” often overlook this obvious point. They say things like “if you bought and held the Dow Jones in 1929, you didn’t get to break-even point until 1952.” Which of course is nonsense. That share you owned as of 1929 certainly was at break-even point… but that share you bought in 1932 (because, not being a moron, you WERE still buying shares) has doubled in value.

But what else did I find? A post from October 2008 where I rediscovered my faith in buying and holding.

Just goes to show how the emotional side of investing is so important.

And yes, I too am still buying.

The test:

When did he first write about this increased risk that he says started in 2007 and is so obvious? September 2007? October, November, December 2007? How about January 2008? March? Maybe May 2008?

If he didn’t write it down in an article, identify it as such then, and recommend whole sale liquidation at the time this obvious increase in risk occurred or shortly there after then he is a charlatan post-dictor and is worthless. Accurate predictors are worth listening to. Post-dictors are really good at reading headlines. However I don’t need assistance in that area, so I have little use for them.

On the plus side, all the ignorant articles on MSN enable truly intelligent investors to make more money over the long-run.

The whole point of higher risk is higher returns. I’m not saying it’s pleasant, and this is certainly a big drop, but I don’t think the risk/reward tradeoff goes out the window (”hey, guess what: you can just trade tactically and you make more with less risk!”). It never will.

I’m open to the idea of having a tactical portion of your portfolio, but I don’t think people should be doing it themselves unless they spend all day at it. I’ll let active managers make those decisions – with a small portion of the portfolio.

It goes back to asset allocation. For investors with a long time and a strong stomach, this market is probably a good thing (ignoring the stress, job/home losses, gov’t intervention and consequences, etc). If you’re retired, hopefully you had more in bonds. Even bonds got hit, but that’s part of the program. If you wanted to be as safe as possible why weren’t you FDIC insured products?

Changing your religion now is probably too late.