Stop making it so complicated!
A friend said to me yesterday, “I was thinking about selling stocks now – ahead of the election – and then buying them back afterward.”[ad#Google Adsense 336×280-IA]Hey, that’s fine, whatever makes him happy. But that’s not an investing strategy… that’s a speculation. It’s not based on an understanding of the markets.
Today, I want to show you the simplest possible way to understand investing.
And I promise, just about everything you need to know about the stock market is contained in what I’ll share with you today.
Let me explain…
Remember playing the game “four square” as a kid?
It was the perfect elementary-school game… You didn’t need much: a ball and, well, something to draw four squares to be your playing court. It looked something like this:
Today, I’ll show you my schoolyard “four square” investment model.
You just need to know the answer to two things:
1. Is the stock market cheap or expensive?
2. Is the stock market in an uptrend or a downtrend?
We can build our own four square court based on these two things. Take a look…
The top-right square is good… That’s when stocks are cheap and in an uptrend.
The bottom-left square is bad… That is when stocks are expensive and in a downtrend.
Let’s take a look at the actual historical record on our four squares, going back to 1900…
What do you see?
It’s interesting… You make money in three out of the four states of the market.
When do you lose money? When stocks are in the bottom-left square… When they are both expensive AND in a downtrend.
Where are we now? Today, stocks are in the bottom-right square, based on this model… They are expensive, but they’re still in an uptrend.
These numbers cover the time frame from 1900 to 2013 – so it’s a long study. (The work was done by my friend Meb Faber and economist John Hussman. You can see the specifics here.)
Even after eight straight down days, we are actually still in an uptrend in the stock market. That’s because this study only looks at long-term trends. The eight-day fall wasn’t enough to break the long-term uptrend in stocks.
We are still in the bottom-right corner of the four squares. Based on history, stocks still do extremely well in this corner. Why? Uptrends are POWERFUL. We are still in one.
If the uptrend turns into a downtrend, then it’s time to seriously worry. That’s the only time that stocks tend to lose money.
We are not there yet.
Source: Daily Wealth