Why long term investing is the way to go in the U.S. stock market

When I first started trading, I spent years trying to find the ultimate trading/investment method.
Eventually, I realized that long term investing is the most profitable strategy in U.S. equities. My colleagues and I created a model to trade the S&P 500, and to this day I only trade UPRO (3x ETF for the S&P 500). My trades/investments typically last 6 months – 4 years. Here’s why.

The stock market has a strong bullish bias

The U.S. stock market is different from all other markets in this respect: it has a natural long term bullish bias (until the day aliens come and annihilate the U.S.). This means that if you just buy and hold a basket of stocks for 50 years, you will make money (after inflation). The S&P 500 goes up more often than it goes down (up on 58-60% of days, down on 40-42% of days). The stock market spends much more time in bull markets than in bear markets.

The same cannot be said of other markets. If you buy and hold a currency for 50 years, you will lose money (accounting for inflation). If you buy and hold commodities for 50 years, you’d probably only breakeven (accounting for inflation).

This means that in the U.S. stock market, you always want to be playing from the long side and not the short side. Given enough time, the long side will always win and the short side will always lose. That is why I am always 100% long or 100% cash – I never short. I have seen too many traders get killed by strong trends such as 2009, 2013, 2017, etc.
There’s another important phenomenon in the U.S. stock market: there’s too much dumb money. I don’t mean this in an arrogant sort of way – it’s just a matter of fact. For example, the U.S. economy was clearly sinking by the end of 2006: there were too many warning signs. However, the U.S. stock market kept going up until October 2007!
That’s why I never short the stock market, even if I see a problem that’s clear as day. It’s ok to miss out on part of a rally. It’s not ok to be too early and lose a lot of money (i.e. imagine shorting the S&P in December 2006, 10 months before the market topped). The natural bullish bias and dumb money phenomenon are too strong.

The big money is in the trend

Most of the short term price fluctuations (day to day, week to week) are random. But the longer your time frame (e.g. month to month), the less random those price fluctuations become.
Most short term stock market traders go long and short. They are ecstatic if their account is up 20% a year. Why? Because if most short term fluctuations are random, then it’s very hard to significantly outperform 0% a year! (That’s basic statistics). They don’t allow the stock market’s natural bullish bias to work for them. By going long and short, they’re fighting the stock market’s natural bullish bias.
20% is a bad year for me. My strategy averages 45% per annum. If I cut my exposure by 1/3, my average return would still be 30%, and my risk would shrink drastically.
I’ve told a lot of hedge fund managers that if they stopped shorting and only played on the long side, they would make a lot more money. I literally took them through the exercise: compile your trades over the past 20 years and eliminate the shorts. Of course, this means that they don’t make money in bear markets (sitting on 100% cash). But in the long run, their performance significantly improves.
I’ve tried multiple long-only trading strategies via backtests, but I always came to the same conclusion.

Trading in and out of the market cannot beat “buy and hold”, because the market’s bullish bias is too strong. The rallies that you miss > the small corrections that you catch. 

When you think the market will make a 5% decline, there’s a >50% chance that it will first rise 5% before falling 5% (thanks to the natural bullish bias). So from a mathematical perspective, it’s better to just buy, hold, and ignore the 5% decline.

I will sidestep significant corrections and bear markets

I have no intention of buying and holding during significant corrections and bear markets. UPRO (3x ETF for the S&P 500) will fall 40%+ during a significant correction. UPRO can fall 90-95% during a bear market! A 40% decline isn’t fun. A 90% decline will put me out of business.
Here’s UPRO in a significant correction.

My model has been able to accurately & timely sidestep every single bear market, and has sidestepped all but 3 significant corrections (with no false positives).

Tax advantages

Every country is different, but the majority of countries treat “trading” and “investing” differently.
Buying and holding typically has significant tax advantages over trading. Here’s an example. Let’s say buy and hold is taxed at 25%, and trading is taxed at 50% (because trading is often seen as “business income” in the eyes of the law).

  1. Let’s say Buy and Hold makes 7% a year.
  2. Let’s say Trading makes 10% a year (which is what a lot of traders average).
  3. After tax, Buy and Hold makes 5.25%. Trading makes 5%!

In other words, a trader can work hard and end up worse off than someone who does nothing but buy and hold. The effort-reward ratio is terrible.

Trading is a terrible lifestyle

I could never do day trading or short term trading as a full time profession. I’d probably ruin my health. Wealth means nothing if you don’t have health.
Long term trading/investing requires a lot less time than day trading.
Learn how to invest and trade here.

10 comments add yours

  1. Great read. Back in March, April you were all cash, cause you were waiting for a correction. What happened to that correction? What made you enter the market now?

    • I was waiting for a 6% small correction. Due to my injury, I’m sticking to the medium-long term model and only sidestepping significant corrections.
      That being said, now is not the time to buy if you have cash and care more about the short term. Q1 2018 will be rough for the stock market.

  2. Wow! Averaging 45% returns! I always stayed away from the 3X leveraged ETFs I see the merits using them being 100% long or 100% cash but I am way to conservative and inexperienced to trade like that. Excellent website with lots of good articles.

  3. Troy, I could not agree more with this blog post. I trade the s&p futures daily/flat over night. I kept trying shorts for “that 3-6% correction” that never happened. I kept trying this short at 2290. Then again at 2500 on oct 1st for the start of the first quarter only to wipe away all my trading gains for the year. Now I am very lucky that I am flat on the year. Who made out? Td ameritrade made out with 20k in commission while I am flat on the year! I feel like I have went through a war zone and then some! Talk about health? I feel like this has caused myself to go through some major hair loss with receding my hairline beyond what it should be at 36 years old in addition to going in and out of the hospital with stress reliated herniated disks in my back! Unneeded stress to say the least with this day trading approach! I funded my first futures account in January of 2008! This January will mark 10 years and $60,000 in losses. Funded my last account December 9th of 2016, exactly one year ago and more than doubled it over the summer, just to give it all back looking for “that correction”. I am more than blessed that I am flat on the year. I have been a golf caddie for 18 years funding accounts and losing them solely on s&p futures! I have recently the past 4 years been driving for a limo company. I have this belief that is I learn intraday technical analysis, then why carry golf bags and drive a limo for $200/day when I can trade intraday and make that $200/day in a much easier way! Everyone has there own idiosyncrasies, mine being, well if I make that $200/day on market open or within the first 1-3 hours I feel like I have not really accomplished anything and then tend to overtrade! With golf caddying/driving a limo I feel that $200/day takes a lot more physical effort but feel more self fulfilled by the end of the day. This is a personal issue I’m trying very hard to overcome. Thank you again for all you do! -matt

    • There’s definitely a big psychological part to successful trading. I wish you the best of luck in overcoming your obstacles 🙂

  4. Troy, I think it is important to have an investing strategy you believe in and stick with it. You have that and are clearly way more advanced than most investors. My guess is that not having a clearly defined strategy and not following it consistently if they do have one is were most investors fail. Would be interested in your thoughts?? Tom

    • Yes, that’s exactly it. No strategy is perfect. There will always be a certain market environment in which strategy XYZ doesn’t work. If you jump back and forth between strategies, it’s likely that you’ll get in a strategy just as it goes from “working” to “not working”

  5. I tried trading for a very brief period many years ago. It required too much work involvement, sometimes stress, capital, all the things I didn’t have and didn’t want to acquire. Long-term is good, time in the market rather than timing. A classic strategy for good reason 🙂

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