Picking Tops Versus Buying The Break

May 9, 2016 | Taylor Letterman

In the banking industry, the Rothschild family is a wealthy family descending from Mayer Amschel Rothschild. Mayer established his banking business in Frankfurt, Germany in the 1760’s. Through his five sons, they established an international family of bankers who established themselves in London England, Paris France, Vienna Austria, Naples Italy and Frankfurt Germany.

Recently I heard a famous quote from one of the Rothschild family of bankers which went something like this. “The reason I never lost money in the stock market is because I never picked a top.”

As the DJIA sits as high as 17,740 and the investment community is all bearish again (Sell in May and Go Away) think about that quote again. The reason I never lost money in the stock market is because I never picked a top. How many supposed market gurus missed the greatest rally ever on Wall Street (2009 to present) by picking a top?

I began my career in January 1979, at the Chicago Mercantile Exchange. At that time the Dow Jones Industrial Average was 800. By 1987, the Dow had risen to a high of 2746. I got my first real taste of what a bear market was all about in 1987.

From the July 1987 highs of 2746 to the October 1987 Crash lows of 1616, the DJIA lost a total of 41%. The sad reality of this bear market was this. The brunt of the losses occurred over four trading days.

BUYING THE BREAK - DJIA 1977 to present

1. Wednesday, October 14, 1987 the DJIA lost 95 points (-3.8%)

2. Thursday, October 15, 1987 the DJIA lost 58 points (-2.4%)

3. Friday, October 16, 1987 the DJIA lost 108.35 points (-4.6%)

4. Black Monday, October 19, 1987 the DJIA lost 508 points (-22.6%)

5. For three months the DJIA lost a bit over 7%. In four days the Dow lost 33.4% to close at 1,738.

Today the DJIA is exactly 1000% higher trading at 17, 750. If from the day I started in the industry, January 1979 until today, if I never picked a top in the stock market I would have a return on investment of over 1200%.

When it comes to investing for your retirement, I tell all young adults (twenty-something year olds) the exact same thing. Since you are putting the money into your retirement plan on a monthly basis. And your intention is to not touch that money for 35-40 years, you only make money in the stock market when it goes down. I always get that stoned look back when I say that. And my reply is always the same. “When the stock market goes down you get to buy cheap stock.”

So when it comes to that famous Rothschild quote, “The reason I never lost money in the stock market is because I never picked a top” think about this. What other famous investor does that remind you of? Warren Buffett doesn’t pick tops either. Warren Buffett BUYS THE BREAK.

Get more of TLP’s powerful market commentary and trade recommendations in his next class with John Carter here