Stikcing For The Long Term: Why It's Hard

Howard Katz has penned an insightful article about sticking with the long-term trend. He brings up the point that people who stick for the long term do better than short-term traders, even though the latter take more profits, because the former's profits are large enough to compensate for the greater frequency of losses. The hard part comes with standing pat, though. Katz explains it as the fallacy of the fair price:

Intuitively, it seems quite reasonable to sell after a short term rise. But for the old timers (the chartists of the early 20th century), it was strictly an empirical question. Did it work out better to sell after a small rise or to hold on for a big move? To their surprise, the fellow who sold quickly (on the argument “you can’t take a loss taking a profit”) came out worse. The fellow who played for the big move came out better. Many times he took more profits than losses, but they were tiny profits (and big losses). The really successful traders often took more losses, but their profits were so big as to more than make up for it.

I have been fortunate enough to discover exactly why things are so counter-intuitive and why people are so anxious to sell too soon instead of holding on for the big move. One of the great thinkers of the 2nd millennium was a gentleman named Thomas Aquinas. He was a great man and very influential, but he lived in an ignorant time, and not much was known about economics. He argued that every good had a fair price. He confused what the price was going to be with what the price ought to be. Millions of people all over the world today follow his teachings. When they see a small rise in the good they are following, they decide that it is above its fair price....

He also says that the current bull market (if you peg '08's drop as a correction) has seen gold investors start off timid and get bolder later. Katz predicts that exploration stocks and silver are going to fly as the bull market matures.