Price Down? Don’t Sell?
TheStreet.com’s Arne Alsin offered some very bad advice on August 12, 2004:
“The irrational investor sells shares during periods of price weakness, presumably on the expectation that declining prices are a harbinger of problems to come. That’s faulty logic for several reasons: Share prices rarely reflect reality. Asking the market for a full and fair price quote for your shares, each and every day, is asking too much. The principal purpose of the equity market is to provide liquidity, not to accurately price shares. For example, over the last four years, Boeing’s market capitalization has fluctuated between $20 billion and $60 billion. That’s an outrageous swing in valuation, considering that the underlying business has not changed that much. During this period, Boeing’s sales have fluctuated very little, with a weak aerospace business balanced by a strong defense business. It doesn’t matter which asset class you’re talking about, it never makes sense to accept a price for your asset simply because the offer is lower than it was last week, last month or last quarter. Long-term investors in particular should view current bids for their stocks as largely irrelevant. Once a position is taken, it doesn’t matter if the bid increases or decreases…In the aggregate, profitable companies always increase in value over time.”
A reader responded with:
“I found “idiotic” as you say…that [this writer says] “share price rarely reflects reality” and the implication that balance sheets and valuations do reflect reality. At what point does price reflect reality? He uses the term “long term” ambiguously and neglects to point out that your time horizon may coincide with a 77 percent meltdown in your equity. Has he forgotten that that 1929 highs were not surpassed until 1954 or that 1969 highs weren’t surpassed until 1982? He doesn’t point out to the “long-term” investor that we have just finished a secular bull equity market and if history holds true it might be a while before one will recoup the losses from the buy and hold strategy he is touting. If I was retiring in 2000 and the market tanked and I just kept buying all the way down with no idea of when it was going to come back, what do I do now? I guess I just rely on social security to live on. Everyone is entitled to his or her opinion but anyone who uncritically follows this advice deserves whatever befalls them. [A] quote from…Nathaniel Branden come to mind: ‘If we stay aware of the fact that we are responsible for our choices, decisions, and actions, we are far more likely to choose, decide, and act in ways that will not later become causes of embarrassment, shame, or regret.’”
TheStreet.com should not be telling people that once you take a position it doesn’t matter if it goes up or down. That is poor advice.
