Getting Ready for... Anything 23 comments
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I hadn't thought about it this way until I read this article in the NY Times, but the S&P 500 is down 25% YTD. In my video over the weekend the focus was obviously quarter end, but after a down 9% week it is down 25%. Wow.
That NYT article talked about dividend investing, why indexing has struggled, why active managers have struggled and so on. Dividend investing, via funds, probably means heavy financial exposure although some dividend funds have held up very well. Active managers, per the article, never saw this mess coming.
There was an element missing, which is simply to have less exposure. One point I tried to make about bear markets (before this one started) is that finding the few stocks that will go up while the market is going down a lot is very difficult. Sure, a portfolio of 40 or 50 stocks will have a couple of names that are doing well, but knowing what those would be ahead of time is a long shot.
A client asked me why "demand for equities is poor." I told him I don't spend a lot of time trying to figure out why, because being right is irrelevant for you managing your money or me trying to do my job. Someone will win the Nobel for figuring all of this out and I am happy to leave being right to them.
If you look back at the posts I put up in the summer of 2007 as the market was skipping around the 200 DMA, and then in Q4 when the market rolled over slowly (as it always does at the start of a bear market), when I said the bear had started I was just focused on the message of the market. It warned of trouble but did nothing (that I could see, anyway) to predict magnitude.
It appears, based on the NY Times article and this Barron's piece that I linked to yesterday, that too many people had no plan for defense. Raising a little cash early on is by far the simplest thing you can do. Hopefully you can remember what this feels like, how the market warned way ahead of time and how many pundits told us not to worry.
I can tell you first-hand that most people do not remember these sorts of things but hopefully you will. From the tough-to-remember camp is that bear markets end eventually. They end after the market drops a lot, when sentiment is lousy and there is no end in sight.
I can't make any case for this bear being over, and the market is a long way from demand being healthy, but this is exactly the time to plan for re-equitizing if you are defensively postured. It may be over a year away or just a few weeks, there is no way to know, but the fact that bear markets end should not be forgotten. That they occasionally end very loudly with big fast moves up should not be forgotten. It doesn't cost you anything to be open to the possibility that the market will confound everyone at a time when no one (including me) thinks it is possible.
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This article has 23 comments:
When the bear starts to appear is the best time to review current holdings for points to bail out. Use stops if you have to. Better to be sold out early and watch from the sidelines than be stuck in the downdraft wondering if you will ever recover. Things make a lot more sense when you are sitting in cash and watching.
Once it appears things are improving, you can put your money back into financially sound businesses and let it grow again. The key is to minimize losses on the way down so you have something left at the bottom to re-invest.
I could not agree more.
The past few months (since July 5 to be exact) financial perspective from the sidelines has been like watching a monkey "you know what" a football.
Do you think that our lack of regulation and failed monetary policy will hurt our standing in the world even more? If we are seen as the country that created this mess the fallout could be immense. Also do you believe that the struggles in the Russian economy (I've read their index is down 62% of late) will make them more mercurial than usual? Also for all of you very educated people, I never fail to learn something from this board, would you agree that it might be time to repeal Sarbannes Oxley? I was thinking that that 3 million dollar startup fee was prohibitive to a company going public and that more public companies could dilute short interest in a given company i.e give amateurs like myself a chance to survive a day of trading. Thanks for the help and I look forward to learning.
Do you think that our lack of regulation and failed monetary policy will hurt our standing in the world even more? If we are seen as the country that created this mess the fallout could be immense. Also do you believe that the struggles in the Russian economy (I've read their index is down 62% of late) will make them more mercurial than usual? Also for all of you very educated people, I never fail to learn something from this board, would you agree that it might be time to repeal Sarbannes Oxley? I was thinking that that 3 million dollar startup fee was prohibitive to a company going public and that more public companies could dilute short interest in a given company i.e give amateurs like myself a chance to survive a day of trading. Thanks for the help and I look forward to learning.
In August I told a friend of mine to prepare a plan of what she should do when the index hits 1000, because when that happens she may not have the presence of mind to act rationally. Well, today we came within 8 points of that milestone.
Paraphrasing the old ad: It's now 1057. Do you know where your money is?
I couldn't agree with you more. This was not the $700 billion from last week at work (yet).
I can't believe how foolish people can be... It is almost impossible to determine where and how to invest your money at this stage in the game. As an economist said on Bloomberg this afternoon, what we will see, at the end of this road, one of the largest overhauls of our economic system since World War II -- perhaps ever.
How can anybody foolishly invest in this environment? If you make money it will be pure luck. There are thousands of factors to consider, including:
1. Future government regulation
2. Consumer psychology post crisis
3. Global influence
4. Our position of strength, economically, post crisis
When I hear talking heads (more likely airheads) and others in the various media say, put your money here or there, you are buying stocks in pure B.S.
When the economist was asked several questions on Bloomberg he said, "Nobody knows." That is the most intelligent thing I've heard anybody say on television, the press or on the Internet.
Nobody knows.
The big questions are:
1) Are we headed for deflation, or inflation?
2) What asset classes do I need to be in to participate from the economy going forward?
3) What is the best way to participate in that asset class?
4) What risk management tools do I have in place?
Just a thought....
problems we have, and we'll deal with it, what's the big deal?
when was the last time we didn't have problems?
when was the time that is safe to buy any stock?
People were saying Q1 or Q2 2009 and I think that sounds realistic as a best case scenario, assuming we don't get into some protracted depression-like mess.
Deflation is better than inflation. Inflation wipes everyone out. Your life savings become worthless. As Bernanke said, US has the technology to fight deflation. Print money and drop it from helicopters.
Will the world blame US for this mess? It will, does. But the world already knew US was living on its credit. Problem is, what is the alternative? When you want to stash money away, where do you stash it? France? China? Japan? Brasil? Iceland? Russia? Most of these countries don't have the confidence to reinvest their money back into their own economies. So... the whole world whines about the US being this and US being that, but what is the alternative? US STILL commands the most confidence, that even if *it hits the fan, it will at least be somewhat transparent and something will be done.
And as you can see, despite the fact that the market is melting, dollar is holding. Artificially or not, it's holding.
BTW, I think Bernanke is already dropping money from helicopter. Over Wall St. for now.
deflation better than inflation? that might be a tough sell.
The Fed has an INFLATIONARY campaign that will kick in like no other. New money, cash injections = tons of inflation. More debt, more spending, more money off the printing presses. Just wait - the next 1-2 years will be inflation in a huge way. And it might bring back everyone's home values with it. Hmmm, maybe that's part of the campaign as well.
Regarding the credit crunch, i think that it is the FED, Treasury and Fuld fault that we reached this level. By letting Lehman to fail they derailed the confidence on other financial institutions. It doesnt matter how many financial institutions are bailed out now, you will always be wary if the next one to fail will follow Lehman´s fate. But for the sake of market transparency, this was probably the best thing to do, otherwise the Moral Hazard would be huge benefitting badly managed institutions against well managed ones.
But steps are being taken in the correct way. Governments are seeking to relief the financial system balance sheets and there is no other way than undergoing asset reflation policies .
the 2% rule is an average 2% decline three months in a row. it happens rarely outside of a bear and so marks the beginning of a bear.