Everyone involved in the stock market is a market timer, although many won’t admit this fact.
Some market participants insist that they are long-term investors. They buy and hold. However, they’re still making timing decisions.
Having a position in the market means deciding to buy. And there is always an element of timing in that decision.
In many cases, the buy is based on the simplest trading strategy in the world.
A Trading Strategy Based on Hope
Many who call themselves long-term investors buy when they have money to invest.
It’s important to realize that they aren’t ignoring market timing. Instead, they are letting an irrelevant factor determine the time to buy.
Others decide to buy when they hope prices are going to go up. Hope is the simplest strategy in the market.
Investing on hope often means buying when prices fall. Investors following this strategy might argue that they are buying value.
More often, they are trading solely on hope. The chart below shows how a strategy based on hope works.
General Electric Co. in Its 20-Year Downtrend
This is a chart of General Electric Co. (NYSE: GE).
The stock has been in decline since 2000, yet each rally attracts buyers. Some of them are long-term investors arguing that the stock offers value.
Market action, however, offers a different message. A 20-year downtrend indicates that the stock does not offer compelling value.
In many ways, buyers are hoping that the market is wrong.
They are hoping management will finally understand the problems that plague the company. They’re wishing that the stock will return to its former highs.
Hope is not a trading strategy. GE is in a downtrend because the company faces operational issues.
The Price of Missed Gains
The cost of hope is more expensive than GE’s stock chart shows.
Investment capital is a limited resource. Money that’s tied up in a declining stock is capital that’s not being used to generate gains from a rising stock.
Opportunity cost — the price of missed gains — is the most expensive cost of hope.
Participating in the stock market requires cold analysis rather than hope.
Sell rules are as important as buy rules. And it’s important to always remember that hope is never a strategy.
Michael Carr, CMT, CFTe
Editor, One Trade