Investing: Why It Still Matters
October 10, 2009 by Matt Swayne | Category: Investing
A few years ago, when people discussed investing, they held a certain reverence for the word. It was a necessity. People liked to talk about their financial statements and brag about how well their 401 K was doing.
After about a 40-50 percent drop in 401 K and IRA plans, the word investment is now used almost as a curse word. If George Carlin was around, he might add "investment" to the seven words you can't say on television.
Despite the economic downturn and a lot of less-than pleasing financial statements, investing still matters. Believe it or not, this is a great time to invest. And it's a great time to learn about investing.
People are emotional creatures. While we like to believe that we make rational investment decisions, actually emotions like greed and fear influence these decisions. Because the market is a collective organism, emotional reactions lead to herd movements. Bubbles and busts result.
According to Benjamin Graham, a professor in finance and a pioneer in stock market psychology, "Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed."
Astute investors, like Graham, however, distance themselves from the sway of the crowd.
As investor Warren Buffett, Graham's favorite student, puts it:
“Be fearful when others are greedy and greedy when others are fearful”.
So, in today's market, when fear dominates, the market is actually an opportunity for smart investors who have time to recover losses. For example, the Dow Jones Industrial Average fell 46 percent in 1974 only to rise 49 percent the next year.
Also, during Bear markets, the price-to-earnings ratio (one measure of relative cost of a stock) comes down. This means it's easier to find good stocks at a relatively cheap price.
Here's another bit of info. According to All Star Stocks:
"The worst sustained bear market of the past half century occurred from 1968 to 1981 when the Dow Jones Industrial Average essentially stood still for 14 years. Now that s a bear market! But even during that bear market, including dividends, you still would have earned an average annual return of about 4.3 percent. And that s if you didn' t invest at all during that 14-year period."
Good investors are born in Bear markets.
Matt is the marketing director at Online Investing AI (http://www.onlineinvestingai.com), a company that is developing automated trading strategies for individual investors based on solid investment principles and advanced artificial intelligence technologies.
