Monday, August 12, 2013

 

Will Mom and Pop investors blow it again?

As I mentioned earlier, by definition every stock must be held by someone. So when Mom and Pop buy stocks, they must buy them from someone else, and when they sell them, they must sell them to someone else. Let’s call those other parties “X.” The market rises, Mom and Pop want in, so they buy stocks from X. The market tanks again, and they rush to sell. X buys the stock back.What we know is that X is timing the market, and he or she is making an absolute fortune. That’s because while Mom and Pop keep buying high and selling low, X manages to buy low and sell high, simply by trading with Mom and Pop.As I mentioned above, over 20 years, the average investor with $100,000 missed out on two-thirds of his profits. He should have made $384,000, and instead only made $130,000. What happened to that extra $254,000? It went to X, of course.I can’t read the future, any more than anyone else can. But I know that Mom and Pop have a terrible track record. Over the years, you could have made a fortune just by buying stocks when Mom and Pop sold them and selling when they were buying. And they are buying, heavily, right now. [Emphasis added.]

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