Wednesday, November 13, 2013 | Issue #2164
This Advice Is Timeless
Marc Lichtenfeld, Chief Income Strategist, The Oxford Club
|  This weekend, my family and I watched an old Steve Martin special from 1976. Though the styles were dated, his comedy is timeless.
I've been a huge fan since I was a kid. It was great to see that his comedy has held up over the years. My 12-year-old enjoyed it as much as I did.
Whether you're talking comedy, music or movies, there are some things in this world that stay relevant no matter how many years they've been around.
The same can be true of investment advice. For example:
Stocks follow earnings. This is one of Alexander Green's favorite pieces of wisdom. We may get bull markets and bear markets, but if a company consistently grows its profits over time, its stock price will follow.
View larger image
You can see from the chart above when earnings go higher, stocks almost always follow suit. Only during the high inflation period of the late 1970s was that relationship not true.
If you buy and hold stocks that grow their earnings year after year, your returns will strongly beat the overall market and you'll make good money over the long term.
Cut your losses. Taking a loss feels bad. You feel stupid. So when a stock is going against you, it's very easy to get paralyzed into holding it long after you should dump it.
Therefore you should use a stop loss. It takes the emotion out of investing. When you have a stop loss, you are making a rational decision on when to sell before emotion gets the best of you.
When that stock is going the wrong way, investors often rationalize why they'll hold on. "It's down so much, I can't sell now." "It will come back." "I'll sell it when it gets back to even."
Sound familiar? Put the stop loss in place and stick to it. You'll get out of your positions without letting small losses become big ones. At The Oxford Club, we recommend a 25% trailing stop on most positions.
Let your winners run. This is another tough one for some people. You'd think having a winner would be a great feeling.
Those few big wins can make your entire year's returns.
But for many investors it's very stressful, as they try to figure out how to get out at the top.
Forget it. That won't happen. Instead, continue to rely on your stops. A trailing stop is adjusted upward as the stock goes higher, so you'll have the peace of mind knowing you will automatically sell at a certain price without giving up much of your gains. Meanwhile, you're giving the stock room to become a big winner.
It's not different this time. If you listen to some people, the sky is always falling. The economy in 2008 was as bad as it's ever been in my lifetime. We were on the verge of financial Armageddon. Huge banks failed. Investments that were supposed to be liquid were frozen and the stock market was cut in half.
And then just a few years later, it made up all the losses and then some, hitting new all-time highs.
We've had lots of serious issues to deal with over the decades. Wars, terrorism, inflation, bad economies, bad government... and yet the market has always gone up over time. So no matter what the next crisis is, remember that it's not different this time.
As we head into the end of the year, like Steve Martin, the markets are likely to be wild and crazy. But stick with tried and true market wisdom and your portfolio will endure through the ages.
And like Steve, you'll have enough money to buy an electric dog polisher, a fur sink, a gasoline-powered turtleneck sweater and some dumb stuff, too.
Good investing,
Marc
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