Stocks for the long run

Recently, following the wreckage in the stock market has become a ritual every afternoon at “work.” It’s tough watching the market slide further and further everyday. I began the calendar year with six-figures in my 401k account and the account has gone down close to 50% year to date. To illustrate how bad it has gotten, if I had closed out the account on January 2 and paid all taxes and penalties involved, I would still have more money leftover than what I have now.

I am, however, reminded of something a professor (one who worked in investment banking) I had at UVA said more than ten years ago. He said that the greatest fortunes are often made by doing the exact opposite of what everyone else is doing – buying when everyone is selling and vice versa. Over the past ten years, following this maxim would have cautioned any investor from the speculative frenzy over technology equities in the late 1990s and the real estate craze in the mid 2000s.

It gives me hope today that with the S&P 500 having dropped to where they were in 1997, any investor buying the index today would have an entry point equivalent to having bought during my junior year in college. During my last semester in college and the following summer I invested significantly into Applied Materials, having bought close to 650 shares at a split adjusted price of $7.65. I sold all those shares over the next five years at profits no less than 120%. Applied Materials closed today at a price lower than what it was when I bought my first shares in 1998.

But I realize that getting into the market amidst such volatility is easier said than done. Over the past two months, I have made significant investments into various indexes and individual stocks only to see prices continue to sink. My advice for anyone who is risk adverse but interested in taking advantage of the current market level is to invest in an index mutual funds and to invest only funds that he does not need for at least five (maybe even seven) years. My believe in the efficient market theory and my experience tell me that even when you are right about timing the market, very rarely will your timing be so perfect that you will manage to buy at the very bottom (or sell a the very top).

I am not going to end by saying that me having an MBA makes me better at giving investment advice because recent developments on Wall Street cast doubts into the judgment of many of my fellow degree holders. I will simply point out that during my two years in business school and the ten months of unemployment that followed, I never had to worry about money. Hence proving that not only am I a follower of my own advice but am also a beneficiary of it.