One might conclude the topic today is better suited for investors as opposed to pure traders, but I have evolved to the point where the only difference between the two is time. In other words, if you are “buying and holding” in today’s market, I think you are making a mistake. I believe you should be trading your long-term portfolio. You should not just “buy and hold” and hope for the best. You should assess market conditions and then adjust your portfolio as needed.
Successful trading is comprised of many variables, but one that is under fire, and rightfully so, are the rating services. For example, the excerpt below speaks volumes about the problems with the traditional model.
WASHINGTON — As the housing market collapsed in late 2007, Moody’s Investors Service, whose investment ratings were widely trusted, responded by purging analysts and executives who warned of trouble and promoting those who helped Wall Street plunge the country into its worst financial crisis since the Great Depression.
A McClatchy investigation has found that Moody’s punished executives who questioned why the company was risking its reputation by putting its profits ahead of providing trustworthy ratings for investment offerings.
Instead, Moody’s promoted executives who headed its “structured finance” division, which assisted Wall Street in packaging loans into securities for sale to investors. It also stacked its compliance department with the people who awarded the highest ratings to pools of mortgages that soon were downgraded to junk. Such products have another name now: “toxic assets.”
The problem here is simply old-fashioned corruption, collusion, and the influence of those who pay the bills for the companies that provide investor services. Think about this—the very same companies that provide the ratings are funded by the companies they rate. Does anyone believe this can really work?
So if you rely on these services, think twice about how much you rely on these services. In good times, they might work well for you, but, as we can see in the excerpt above, when the chips are down, the side they choose is the side of those who pay the bills and provide profit.
This coming year looks to be better on average than all of 2008 and the first quarter of 2009, for sure. But to do well, we have to adjust our thinking. Old ways, such as buy and hold and utilizing rating services, no longer apply. No, given what we have learned in the past two years, we should take responsibility for our portfolios. We should actively move assets in an out as necessary. This means we need to rely more on what we know about our investments, and less on what others tell us, especially those who we have trusted to provide us fair ratings.
