Act Defensively, But Not from Fear

Yesterday, sort of early in the day I sold the rest of SDS when the market was about flat. I also sold another stock (not so widely held) along with it as a partial offset to being wrong on the sale, and for the tax loss.

The cash level is now very high but still,anyone who has used inverse products during the bear market has probably come to view them quite fondly as either a crutch, emotional support or an old friend (lol). So I sent an old friend packing yesterday with the market down 37% from its high.

The logic is simple and posted before: The risk of the market going down a lot is much less after it has already gone down a lot, yesterday's closing notwithstanding.

Clearly this has been bad on a historical level, as market action goes. I don't think it changes the notion that at some point it must exhaust and work higher. Reader TomK left a comment boldly (not being sarcastic) calling the bottom as being yesterday. I simply don't know.

As I wrote about taking defensive action more than a year ago, I commented that being correct about magnitude was not a priority -- just missing a chunk of the decline was the priority. The biggest difficulty for me personally is that people are worried despite the action taken.

Being worried is reasonable, as this is what happens during panics; seemingly no end to the selling in sight. A 20% decline in a couple of weeks is real gut check time. If you have been reading this blog for a while you know where I am coming from in terms of faith that as the market has malfunctioned before it then works higher. Whatever fear you feel now, I am telling you the fear in 1987 and the summer of 2002 was the same. I try to post a tone that reflects my emotion -- which, as my brother told me the other day, I have no emotion.

Here's why: I take my own advice about bracing for periods like now, knowing what has happened before and realizing that the only thing I can control is the action I take (which I've obviously been writing about for years now). I have no control over what the stock market does. I have enough to worry about with the bridge from the Red Sox starting pitching to Jonathan Papelbon. The middle relief has been tough all season.

Comments

[anarchist:]

SDS is up nicely today. Of course no one can pick a bottom but you move could be the reverse of "catching a falling knife".

2008 Oct 10 10:57 AM

[Smarty_Pants:]

Sensible approach. Nobody said you have to capture ALL the possible gains.

Rule 1) Avoid taking big losses.
Rule 2) Get the biggest gains you can without risking a violation of Rule 1)

I always have to chuckle when people write articles showing how much better you do 'staying the course' than trying to 'time' the market.

You know, the "If you missed the 10 biggest gaining days your returns sucked" crowd. What they always overlook in their analyses is what would have happened if you missed the 10 biggest losing days instead.

Anyone who has really studied the market can improve their chances of better returns by avoiding large market drops. Only problem is it takes a bit of work. There isn't some 'magical' indicator to tell you everything you need to know. There's a lot of experience involved, but it can help.

2008 Oct 10 11:12 AM

[MSmailbox:]

I'm sitting on substantial paper-losses, but I have cash and my home is paid off, so I am very thankful for that. Nevertheless, I am very sad... This isn't an easy thing to watch... My raft has been leaking air, like everyone else's, but I am dismayed by those who are jumping out of their rafts, into the ocean. Ultimately, I may go down, but these poor souls have taken that into their own hands and will be unlikely to restore their positions, when things swing back up. I feel no panic, it just makes me sick to see all the ones that are jumping from their boats... The first phase of this horror is bad enough, but when the market swings up and they realize what they've done, I can't bear to watch. If I'm wrong and the world does come to an end, then I'll be glad that I held my positions, left all of my cash in the bank and acted responsibly, during the panic. I have done everything that I know to do.

2008 Oct 11 10:35 AM

[ken wender:]

Roger, you are wrong, fear can be helpful, it made me go to 95% cash on 8/8, saved me a ton. Since 8/8 the S&P is down 30%

2008 Oct 11 11:35 AM

[Roger Nusbaum:]

khwender, the trade turned out to be correct, could have just as easily gone the other way. simple a matter of luck. your statement has fallacies galore. hopefully you can detach enough from the situation to see that.

2008 Oct 12 08:41 AM