What does “the trend is your friend” mean? We probably all know what this means intellectually, but how many of us actually follow it in our real lives?
For those who have not heard this phrase, I explain. When investing, or studying almost anything in life, there is almost always a general flow or movement to how things work.
The general trend in the workplace is that the more experience you have, the more you understand and the more money you make. With a little luck.
The old general theme in US stocks was that everything goes up: stocks, bonds, income, jobs and house prices. Some of these trends have ended, while others are in progress.
When a trend is taking place, the best advice is to step aside or participate in it, but never try to prove it wrong. People try to prove the trends wrong because they intellectually believe that these trends should not be happening.
It doesn’t matter whether or not a trend should be occurring. Reality is reality is reality. When I see a trend, all I want to decide is whether to stay on the sidelines or to participate. The problem with trying to prove a trend wrong is that, well, it’s really bad for the bank account.
What are some trends that are taking place in the world? We as a species are becoming healthier and living longer. Drinking water has gotten cleaner over the last 1,000 years and will continue to get cleaner.
Quality of life has been on an upward trend over the last 200 years in the United States and in most of the world. Unfortunately, the amount of debt that the United States and Americans have been accumulating is also a strongly increasing trend.
As of today, the amount of debt our federal, state, local, personal and corporate entities have accumulated is over $40 trillion (this number comes from Richard Russell’s statement dow theory lettering).
That’s an incredibly large number and it’s never been a real problem before because our trend growth and profitability have always grown faster than our trend debt. But the US growth and profitability trend went off the rails a couple of years ago. Unfortunately, the trend for US debt hasn’t changed one iota.
We all know what happens to companies like Enron, WorldCom, and United Airlines when they have too much debt to manage properly.
The same goes for countries that cannot pay their debts: Argentina, Uruguay and perhaps soon the US.
But what happens when the world’s biggest debtor can’t pay its bills? Who’s going to come after us to collect? Maybe no one, but we’re still going to be in serious pain.
If America can’t handle its debt, foreign investors will stop investing in our country and start taking their money out. It’s already happening. Foreign direct investment in the United States has slowed considerably.
We used to be the number one recipient of foreign direct investment, but guess who is the number one recipient country now? Porcelain. When foreigners start moving their money out of this country, the markets will over-correct, and we could see a big drop in the markets. In the immortal words of Bob Dylan, “The times are a change.”
Going back to the question. What does “the trend is your friend” really mean? The trend shows which direction a “thing” is moving, and unless something major happens, that trend will continue. Think of a trend as a freight train with 100 cars.
I’ve been told that a train this long takes MILES to stop. The other alternative to stopping a train of this length is derailment, and then it will stop in feet, not miles.
There is a very easy way to determine the trends in stocks, bonds, gold and commodities. The most revealing way to see a trend is to look at a price chart for one of the investment vehicles mentioned above.
That, by the way, is how I’ve been investing for the last ten years. I think the reason price charts and trends are the only way to trade is because they never lie. And they are the purest form of data available.
What could be better than raw data and a trend to point you in the right direction?
One trend is toward investments that provide the highest returns with the lowest risks IF you understand how to invest in them. But at least you’re looking for the right investments.
An uptrend is like a train going up a mountain. At the top of the mountain, money grows bigger. At the foot of the mountain, money grows less.
An easy way to determine if you’re on the train up or down the mountain is to look at a price chart.
What way is the price trend? The answer may not always be up or down; sometimes the trend is erratic and sideways, but even with erratic and sideways trends, you have a better idea of where the stock is moving.
Looking back on a trend is easy. Anyone can look at an 80-year stock history and see what went up. The problem is that during those 80 years there were increases and low
And life would have been great if you had invested your money on the first day, 80 years ago, and withdrew it 80 years later. But I have yet to meet anyone who has done that. Here’s the nitty-gritty: understanding when the trend has changed, or is changing, and knowing what to do about it.
I think that we are in one of those reversal stages right now. A lot of stubborn people will look back and say, “How could I have been so stupid?” The decisions people are making right now will have the biggest impact on their future.
There is a lot of pain in learning these rules, but I sincerely believe that humans cannot learn unless there is pain involved. The pain of losing money is not enough for learning to occur. Think about how children learn that a stove is hot.
Moms or dads told kids not to touch it. Parents know that a stove is hot; they played it decades ago and still remember the experience. But for a child without pain to reinforce the warning, the meaning of the warning is not learned.
So how do children learn? They touch the stove. Not just once, but multiple times to make sure the lesson is remembered. The same thing happens at school. Students who don’t do their homework get into trouble. There is pain again.
Tony Robbins said in one of his books that a person will not change anything in his life until the pain of not changing overcomes the pain of changing. How true is this.
Take time to research your investments online at bigcharts.com. See which direction they are moving and then ask yourself where you would like to go. Look at the one-year, two-year, and three-year charts. What is the general trend?
You may find that you are on the wrong train. Do something now to limit the amount of pain you will have to endure in the future. I know stock hunting may not be fun for everyone, but being 50% poorer in a few years seems pretty painful.
Together we are protecting your money,
RC chopper, CFP®
