The “magic carpet” mentality is jumping on the carpet (stock) at a low price and riding the carpet (stock) up to a high price. As it rises, advocates of this approach jump off the winner, take the gain and move to another magic carpet at a very low price hoping to catch the next updraft.
This is a pure fantasy idea. If it could be done, many would be doing it well. Many try but most fail and often fail miserably.
First, if it did happen, any short term gains (< 1 year holding) the investor (speculator in reality) makes are taxed at ordinary income taxes. That means the government takes their cut of the gain and there is less to reinvest. If the magic carpet is held longer than a year, the gain is taxed at more favorable capital gains taxes (20%, 15% or 0%). Still, the government takes their cut and the remaining investable amount is less.
Second, it is impossible to be right consistently. Often the magic carpet loses altitude and sinks into the ground. Many will, from a behavioral bias basis, hold these losers hoping to get back to even. The market is notorious for being very difficult to predict short term. Furthermore, virtually anything positive that happens in a corporation takes years to get done just like personal projects. When was the last time you snapped your fingers or wiggled your nose and some project you are doing got done immediately? It doesn’t happen personally and it sure as heck doesn’t happen that way with big companies, but you would think by the way stock prices change in short time periods that things are happening immediately. Don’t be fooled.
Forget the magic carpet (except the great song Magic Carpet Ride by Steppenwolf!) and spend your time investing in quality companies that are well managed and have smart strategies.
Usually the best stock purchases are made when the market values quality companies at low levels and the market shows little interest. If it is a quality company, it will get noticed eventually. The market always has a herd mentality so what is viewed as crap at one time is later viewed as golden at a later time. The key attribute to have is patience which is in short supply in the digital age.
Leave the childhood fantasies at the door and get down to investing for the long term. You’ll be ecstatic that you did, but it will not happen tomorrow, next week, next quarter, or this year. Like a career, success doesn’t happen overnight!
Be smart, be well-read, be aware and be successful.
