It's Too Late To Sell Stocks, Just Wait 10 comments
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John Heinzl wrote a humorous column in the Globe and Mail today entitled, ‘10 things the credit crisis taught me about investing.’ The part that made me laugh the most was the first lesson:
“All stocks are risky, even the safe ones. You can buy the most conservative stocks, focus on the most recession-proof industries and diversify until the cows come home, but guess what? You’ll still get crushed when the market decides to roll over. Why? Because the stock market hates you.”
I’m sure his ten lessons were meant mostly tongue-in-cheek. But, seriously, if one is letting recent volatility influence them and shake their discipline (e.g. Lesson 2: ‘Buy-and-hold, buy-and-schmold’), then they perhaps shouldn’t be investing in stocks.
The current stretch of bearishness has been extreme but investors have to realize it is part of the process. Stocks go up and they go down and one should only be in stocks if they have a long term view and can wait out the downturns. Money needed within five years should never be stocks.
It really does seem true that:
“People may read an investing book that tells them they can get an average 9% per year if they only buy and hold stocks over the long term… However, when the market does crater, the actual experience turns out to be a lot different than reading about it in a book. Newspaper headlines are full of doom and gloom. The permabears get more air time and their theories of cataclysmic decline begin to look more plausible And so on: it’s truly a scary time, one that can even produce insomnia for some investors — and waves of selling” (From Why investors get burned, Jan. 17, 2008)
The thing to do is to stop checking the investment account. If your stocks are already down 30% to 60%, it’s too late to sell. Get busy with other things. The only reason to be watching stocks now is if you want to buy some bargains, do some trading, or rebalance the portfolio — otherwise get busy with work, family, etc. Put the market out of mind, unless it is to visualize what it will look like 3 to 5 years from now when the markets will likely be in love with you again.
For some thoughts on taking it a step further and actually increasing exposure to stocks, see ‘Psyching up to buy.’
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This article has 10 comments:
Larry, What then would you recommend to a newer investor who used the margin feature of their account before the violent downturn, and is now facing margin calls because stock has surprisingly lost 40-60% of its value almost overnight? Is this part of the brokerages and banks capital raising exercises? These are serious questions. Thank you in advance for your reply.
For now, trade small. You WILL make mistakes. More now than you will later when you have more experience. Keep the cost of those mistakes down by using small numbers of shares. For now concentrate on doing the right thing rather than making a lot of money. As you gain experience you can use larger positions.
A good beginner's book on investing is "Stan Weinstein's Secrets For Profiting in Bull and Bear Markets". It costs about $15 here:
www.amazon.com/Stan-We...
If you're new to investing you shouldn't be using margin anyway until you get some experience under your belt. It's a BAD idea as you can probably see now.
September 2008: +24.3%
3rd Quarter 2008: +45.2%
YTD 2008: +80.6%
This was accomplished at a time when the Dow30 has dropped more than 30% for the year. Buy & Hold just doesn't work!
If your system is that good, why don't you mortgage your house and invest in your system.
Malkiel makes an indisputable historic observation about the valuelessness of green-eye-shade technical analysis, stock gurus, systems, actively managed mutual fund investing, and the inevitable market bubbles created by the greatest fool who is last to subscribe to those techniques.
The market is efficient, and those who try to predict do so at their own peril.
I suggest that an investor open a margin account when and only when the investor has lived through a complete market cycle.
Can't hide behind sound names like GE, they are getting hammered too. I am going for the gusto, if the economy is going down the tubes, might as well go for high multiples with a 5-10 year hold window. I am trading laterally within a sector with producer names that are sound and pay a large dividend or are a small / medium cap with a large resource, such as oil, gas, gold, coal, iron, zinc, copper, platinum, nickel and uranium. The multiples from the 52 week highs to the lows of this week are very compelling (5 to 20 ratios). If the economy is going to move laterally over the next few years, there will be a lot of M & A activity, if the market is going to crash (tho the Fed are trying hard to ensure it dont happen), these resource stocks will survive. In 5 years I will be either thilthy rich or thilthy poor. Hopefully, naked selling and short selling will be outlawed. Maybe a non deductable 1/4% tax per share value will re-establish traditional long term holds.
George