Escaping 2000 and Avoiding 2008: An All-Around Investment Strategy

Original draft from August 7, 2016

If you are willing to spend three minutes reading this article, you will benefit greatly. May your investing go smoothly!

I. Critical Moments:

Over the past 35 years, from 1980 to 2016, the market had two bear markets, in 2000 and 2008, but economists and Wall Street predicted more than ten. Investors should understand that the market rises most of the time. There are very few times when stocks truly need to be sold, but those moments are critical.

To profit from investing, you must recognize the critical moments and know how to avoid risk!

Buffett's three rules of investing:

1. Avoid losses!

2. Avoid losses!

3. Remember the first two rules!

There are two keys to avoiding losses: (This is a retrospective record of my own history. Today, my approach is: buy whenever I have money, hold no matter what, and absolutely do not trade.)

1. When to buy!

2. When to sell!

Today we will discuss the critical moment for selling and how I avoided bear-market risk in 2000 and 2008.

In 2000, I was still in the IT industry and was traveling in the United States. During breakfast at the hotel, I heard a television news report that a major company had poor financial results. From 1990 to 2000, the results of the great majority of companies exceeded market expectations every year. When I suddenly heard that morning that the results were poor, I thought I had misheard. But I had not; the results really did disappoint the market.

My business knowledge and intuition from market experience told me that something had gone wrong. I stopped eating breakfast, did not care that I would be late for the meeting, immediately returned to my room, and sold all my holdings. Only then did I go meet the client. That is how I avoided the dot-com bubble in 2000. The market did not bottom until 2003.

(I retired in 2004 and began investing my own money full time and teaching investment.)

The second time was in January 2008. Technical analysis of the market had completed a topping pattern, with moving averages aligned bearishly, as shown below. I knew something was wrong with the market, so I told all my students to exit it completely. As a result, we avoided the subprime-mortgage bear market. We did not re-enter until the low on March 10, 2009. (If there is an opportunity, I will explain why I judged March 10, 2009 to be the entry point at the low.)

In those two bear markets, aside from the subjective bearish conditions in financial reports and technical chart patterns, the most important factor was the frenzy in the external environment. Therefore, if there is no frenzy in today's market, there is no bubble. Without a bubble, investors can invest with confidence. (The market always grows amid doubt.)

Gradually, everyone will learn the more important topics below:

II. Avoiding Risk

III. Stock-Picking Skill

IV. A Strategy That Does Not Lose Money

If you agree with this content, please share it with those who need it so that more people can learn sound investment principles.

All information we provide is solely a sharing of personal experience. We are not Certified Financial Advisors/Planners or professional tax advisers. Investment decisions and tax matters should be based on personal research or professional advice and should not rely solely on this content.

Original draft written on August 9, 2016

Avoiding Risk — Escaping 2000 and Avoiding 2008: An All-Around Investment Strategy (II)

Today we will discuss II. Avoiding Risk.

The greatest risks for investors:

Buying financial products they do not understand, especially insurance and annuities. Insurance and annuities require payments over a long period, and the total amount is very high. They often cause investors long-term losses and damage to their wealth, preventing them from reaching their financial-planning goals.

Buying stocks after hearing the news. Investors often spend several days researching an appliance and several months researching before deciding to buy a car, yet spend only one minute acting on hearsay before buying a stock. Naturally, this type of investing ultimately ends in losses. Although it may occasionally make a little money, over the long term it will certainly lose money.

Investors trade frequently, chase rising prices, and sell into declines. Their investing is entirely controlled by psychology, while they do not understand fundamentals, industries, or market risk. Frequent trading is the investor's greatest enemy. My greatest profits came from doing nothing.

Investors fail to recognize the arrival of a bear market. Although the previous section, Critical Moments, explained how I avoided the bear markets in 2000 and 2008, one thing it did not mention was market sentiment. Upward market trends usually continue for many years, absolutely longer than most people imagine. Therefore, for the great majority of the investment period, the approach is to buy, hold, and not trade.

At present, in August 2018, everyone is worried that the market has risen too much and stock prices are too high. With market sentiment like this, the market is actually safe. Only in the future, when all investors become frenzied and even friends who normally do not invest begin boasting about how they made money in stocks, will the bubble's peak quietly arrive. When everyone becomes a stock-market expert or investment adviser, and friends who never touched stocks in the past can give you investment advice and hot tips, we should be especially careful, careful, and careful again. The market will already be in a bubble, the bubble will not be far from bursting, and it will be time to prepare to leave the market.

These four recommendations help investors understand what not to do before they even begin making money. Hold stocks steadily and observe market sentiment.

The following topics will be continued next time:

III. Stock-Picking Skill

IV. A Strategy That Does Not Lose Money

If you agree with this content, please share it with those who need it so that more people can learn sound investment principles.

All information we provide is solely a sharing of personal experience. We are not Certified Financial Advisors/Planners or professional tax advisers. Investment decisions and tax matters should be based on personal research or professional advice and should not rely solely on this content.

Original draft written on August 16, 2016

Stock-Picking Skill — Escaping 2000 and Avoiding 2008: An All-Around Investment Strategy (III)

I. Critical Moments: (already published)

II. Avoiding Risk: (already published)

We have already discussed the topics above: critical moments and avoiding risk.

Today we will discuss stock-picking skill.

III. Stock-Picking Skill

Until investors can be certain that they can select individual stocks capable of outperforming the market, my conscientious advice is to buy only index funds. Stock investing must overcome many factors to outperform the broader market.

1. Stock-picking skill.

2. When to buy.

3. Enduring major market swings and being able to hold on.

4. When to sell: selling at the frenzied high in market prices; U.S. taxpayers must pay high taxes after selling stocks.

Today we will focus only on how to select a good stock.

1. A company that will not deteriorate over the long term:

Before investing in a company, first determine whether its business model is unique. Only a business model that keeps growing—one that did not exist in the past, exists now, and will have more demand in the future—is worthy of investors' attention. It should be a business model that most people need every day.

What type of company has a unique, long-term growth business model?

First, the company should operate in a leading industry that everyone needs every day, or at least every week.

For example, Facebook [FB]—this is not an individual-stock recommendation—is needed by almost everyone every day and already has 2.3 billion users. With so many users, Facebook has a sustainable business model. Because people need it every day, Facebook can replace newspapers, television, magazines, and other media as an advertising provider. In the past, global advertising was divided among each country's media. Now, global online advertising, as traditional advertising nears its end, has been monopolized by a small number of global internet leaders. Facebook is one of the largest and most efficient advertising platforms. Imagine the opportunity when global advertising is now controlled by Facebook—along with Google [GOOG], of course.

There are also many industries and companies in our lives that everyone needs every day, such as Amazon [AMZN], PayPal, SQ, NVDA, BAAB, FB, AAPL, TSMC [TSM], Chunghwa Telecom [CHT], 7-Eleven Taiwan, and GOOGLE [GOOG], among many others. Taiwan and the United States both have excellent companies that keep earning money, pay dividends every year, and have inexpensive share prices. There is no need to search for a needle in the ocean of other markets; pearls are everywhere around us.

Second, leaders in industries of the future. An emerging industry's growth rate is bound to be strong. Consider online banking, which is now developing rapidly. In the future, individuals and stores will no longer transact in cash; everything will move to mobile payments. Business and personal loans will also be replaced by online and mobile banks. Thus, in the United States, PayPal [PYPL], Square [SQ], and AAPL are tomorrow's stars in online banking and mobile payments. Their annual revenue growth is above 40%. This is the standard for an emerging industry, and these American companies are leaders in their specialized services. Imagine the opportunity when future financial businesses such as payments, loans, wallets, and investing are all replaced by mobile services.

When we select a good industry and identify a good company with strong growth in revenue and profit that can continue for a long time, it is a company worth investing in and holding forever.

That concludes today's discussion of stock-picking skill. In the future, we will discuss what an investment strategy that does not lose money means.

IV. A Strategy That Does Not Lose Money

If you agree with this content, please share it with those who need it so that more people can learn sound investment principles.

All information we provide is solely a sharing of personal experience. We are not Certified Financial Advisors/Planners or professional tax advisers. Investment decisions and tax matters should be based on personal research or professional advice and should not rely solely on this content.

Original draft written on August 7, 2016

A Strategy That Does Not Lose Money — Escaping 2000 and Avoiding 2008: An All-Around Investment Strategy (IV)

Today we will discuss the final topic: a strategy that does not lose money. We have already covered three topics: critical moments, avoiding risk, and stock-picking skill.

Today we discuss the final topic: a strategy that does not lose money.

Look at the stock below. It has risen for 60 years. What company is it?

In investing, one strategy that does not lose money is to buy a U.S. index and hold it for life. Its return is also very high, reaching an annual return of 10%.

Looking at the long-term S&P 500 chart:

The U.S. index rose from 17.29 points in 1950 to 2,850 points in August 2018, a 158-fold increase over 69 years and an annualized return of 9.6%. No wonder even Buffett recommends that investors buy U.S. index funds. Of all securities in capitalism to date, this has been the most stable long-term investment target with high returns.

Therefore, if investors want a stable long-term investment that does not lose money, they should invest in U.S. indexes for their entire lives.

Investors in the United States are fortunate: they can directly buy the U.S. index funds SPY and QQQ.

Note dated July 11, 2026: We now recommend investing only in Nasdaq-100 index funds. The performance is shown below. From March 1999 to today, the fund rose 13.8 times. The annualized return is (13.8)^(1/(2026-1999)) = 1.102, or 10.2%.

Over the past five years, it doubled. The annualized return is (2)^(1/5) = 1.149, nearly 15%, as shown in the attached image.

If you agree with this content, please share it with those who need it so that more people can learn sound investment principles.

All information we provide is solely a sharing of personal experience. We are not Certified Financial Advisors/Planners or professional tax advisers. Investment decisions and tax matters should be based on personal research or professional advice and should not rely solely on this content.