Most Popular
1. THE INFLATION MONSTER is Forecasting RECESSION - Nadeem_Walayat
2.Why APPLE Could CRASH the Stock Market! - Nadeem_Walayat
3.The Stocks Stealth BEAR Market - Nadeem_Walayat
4.Inflation, Commodities and Interest Rates : Paradigm Shifts in Macrotrends - Rambus_Chartology
5.Stock Market in the Eye of the Storm, Visualising AI Tech Stocks Buying Levels - Nadeem_Walayat
6.AI Tech Stocks Earnings BloodBath Buying Opportunity - Nadeem_Walayat
7.PPT HALTS STOCK MARKET CRASH ahead of Fed May Interest Rate Hike Meeting - Nadeem_Walayat
8.50 Small Cap Growth Stocks Analysis to CAPITALISE on the Stock Market Inflation -Nadeem_Walayat
9.WE HAVE NO CHOICE BUT TO INVEST IN STOCKS AND HOUSING MARKET - Nadeem_Walayat
10.Apple and Microsoft Nuts Are About to CRACK and Send Stock Market Sharply Lower - Nadeem_Walayat
Last 7 days
The NEXT BIG EMPIRE WILL BE..... CANZUK - 25th June 22
Who (or What) Is Really in Charge of Bitcoin's Price Swings? - 25th June 22
Crude Oil Price Forecast - Trend Breaks Downward – Rejecting The $120 Level - 25th June 22
Everyone and their Grandma is Expecting a Big Stocks Bear Market Rally - 23rd June 22
The Fed’s Hawkish Bite Left Its Mark on the S&P 500 Stocks - 23rd June 22
No Dodging the Stock Market Bullet - 23rd June 22
How To Set Up A Business To Better Manage In The Free Market - 23rd June 22
Why Are Precious Metals Considered A Good Investment? Find Out Here - 23rd June 22
UK House Prices and the Inflation Mega-trend - 22nd June 22
Sportsbook Betting Reviews: How to Choose a Sportsbook- 22nd June 22
Looking to buy Cannabis Stocks? - 22nd June 22
UK House Prices Momentum Forecast - 21st June 22
The Fed is Incompetent - Beware the Dancing Market Puppet - 21st June 22
US Economy Headed for a Hard Landing - 21st June 22
How to Invest in EU - New Opportunities Uncovered - 21st June 22
How To Protect Your Assets During Inflation - 21st June 22
AI Tech Stocks Current State, Is AMAZON a Dying Tech Giant? - 20th June 22
Gold/Gold miners fundamental checkup - 20th June 22
Personal Finance Tips: How To Get Out Of A Tough Financial Situation - 20th June 22
UK House Prices Relative to GDP Growth - 19th June 22
Will Global Markets Be Pushed Deeper Into Crisis Event By The US Fed? - 19th June 22
Useful Things You Need To Know About Tweezer Top Candlestick Pattern - 19th June 22
UK House Prices Real Terms Sustainable Trend - 17th June 22
Why I’m buying the “new” value stocks… - 17th June 22
Optimize Benefits from R&D in Software Product Development with an R&D Tax Credit Software - 17th June 22
Want To Save On Your Business Energy? Here Are Some Helpful Tips - 17th June 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why "Losses Are the Norm" in the Stock Market

InvestorEducation / Learning to Invest Oct 14, 2021 - 11:59 AM GMT

By: EWI

InvestorEducation

"I can measure the motions of bodies, but I cannot measure human folly."

Did you know that Sir Isaac Newton "lost his shirt" in the South Sea Bubble of the 1720s?

This great scientist and mathematician lost more than the equivalent of a million 2021 dollars.

Here's a brief description of Newton's investment actions from Robert Prechter's landmark book, The Socionomic Theory of Finance:

[Sir Isaac Newton] invested a little bit early in the trend and "wisely" took a small profit. Watching the trend continue, he finally bet heavily and "wisely" held on for the long run. He eventually sold out at a near-total loss.


After this financial loss, Newton said:

"I can measure the motions of bodies, but I cannot measure human folly."

Newton's unfortunate investment story is instructive because it summarizes why stock market losses have been the norm among investors after a full market cycle.

In other words, investors are typically "timid traders early in a bull market and confident long term holders at the peak."

To drive the point home more starkly, let's look at how investors made out in a mutual fund over a 10-year period versus the performance of the fund during the same time span.

Let's start with this Dec. 31, 2009 Wall Street Journal quote:

The decade's best performing U.S. diversified stock mutual fund [is] Ken Heebner's $3.7 billion CGM Focus Fund, which rose 18.2% annually. ...

Here's a table of the mutual fund, showing the growth of an initial $100,000 investment:

As you can see, that initial investment more than quintupled in value as it grew at 18.2% annually, compounded. Quite a performance in a decade when the S&P 500 lost value.

Now, let's look at how much money investors in the fund made.

Let's return to that 2009 Wall Street Journal article:

The typical CGM Focus shareholder lost 11% annually in the 10 years ending Nov. 30. ...

Yes, you read that right.

Let's return to The Socionomic Theory of Finance for a look at another table of the mutual fund:

The average investor in CGM Focus Fund during that 10-year period turned $100,000 into $31,200 for a loss of 68.8%. That is 94% less than the growth of the money in the fund.

The reason for that loss boils down to "herding" or "following the crowd."

As that Wall Street Journal article said:

These investor returns incorporate the effect of cash flowing in and out of the fund. Shareholders often buy a fund after it has had a strong run and sell as it hits bottom.

If you'd like to learn how Elliott waves reflect the repetitive patterns of "crowd behavior," you are encouraged to read the Wall Street classic, Elliott Wave Principle: Key to Market Behavior, by Frost & Prechter. Here's a quote from the book:

The Wave Principle is governed by man's social nature, and since he has such a nature, its expression generates forms. As the forms are repetitive, they have predictive value.

You can access the online version of the book for free after you become a Club EWI member. Club EWI is the world's largest Elliott wave educational community and is free to join. As a Club EWI member, you'll enjoy free access to a wealth of Elliott wave resources on investing and trading without any obligations.

Follow this link to get started right away: Elliott Wave Principle: Key to Market Behavior -- free and unlimited access.

This article was syndicated by Elliott Wave International and was originally published under the headline Why "Losses Are the Norm" in the Stock Market. EWI is the world's largest market forecasting firm. Its staff of full-time analysts led by Chartered Market Technician Robert Prechter provides 24-hour-a-day market analysis to institutional and private investors around the world.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in