Panic
Speaking as a Former Stockbroker
I am a former stockbroker for Merrill Lynch, Dean Witter, and Charles Schwab. I currently am not involved in the investment business. I have no special expertise in the field except for my brokerage experience. So, what I'm about to say is not investment advice, and I wouldn't pretend that it was.
On the other hand, I did have the benefit of great training and experience with these top-notch firms, I was a licensed broker, and I learned some valuable lessons. So, now, I offer you the benefit of my hard-won wisdom in the field. I feel compelled to say something, as I know that many people are hurting at this time because of the market.
I'm going to make this short, and keep it simple. I am advising you in a general way, but not with any specifics. Take what I say into account when you make your market decisions in the coming weeks.
Simple Principles
I am going to say only two simple things. What goes up, comes down; and vice versa.
And, the best time to buy quality stocks in the stock market, is when stocks are falling, and/or at a bottom. Contrarily, the worst time to buy any stock is when it is at a high point, when the stocks are wildly rising.
Buy low, sell high.
Amateurs Lose with Market Tops and Market Bottoms
Amateurs make two mistakes. They panic on the way up, and they panic on the way down. The panic on the way up leads them to buy at market tops. This is where they fear they are going to miss the next move up. This panic is motivated by greed, and the fear they will miss out on profit. The panic on the way down is caused by despair, and wanting to preserve what little capital they have left.
Franklin Delano Roosevelt said, "There is nothing to fear but fear itself." How true.
The Clever Investor
So, what strategy should the investor take? The wise investor doesn't care whether the market is rising or falling. He/she does not panic, but adopts a strategy that wins in either case.
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A Rising Market
The clever investor buys aggressive stocks on the way up. Then, when the market has been rising and rising, begins to buy less aggressive stocks, switching eventually to defensive stocks, and starts selling the aggressive stocks he/she has already bought. On the way up, he/she eventually shifts more and more to a cash position, choosing bonds instead of stocks.A Falling Market
On the way down from a top, the clever investor starts converting cash and bonds into shares in the stock market. Initially, he/she begins by buying defensive stocks. As the downturn in the market progresses, he/she starts buying aggressive stocks again.The Secret
What is the secret? Being contrary. Whatever the "little people" are doing, do the opposite. This makes sense, since the "little people" rush to buy at market tops, and rush to sell at market bottoms. The "little people" lose all the time during market swings.
So, resist your impulses. Don't jump in and try to guess market tops and market bottoms. No one can do this. Instead, average in and average out. As the market rises, begin taking some money out and putting it into bonds, as well as start selling aggressive stocks and replacing them with defensive stocks. Vice versa when the market is falling. Begin taking bond money out and buying defensive stocks, and later aggressive stocks.
You want to be buying heavily the further the market falls, and selling heavily the further the market rises.
If You're Stuck in Positions and Run Out of Money
If you run out of money on the way down, don't panic and sell. Just wait. Park your money and don't look. Only sell then if the fundamentals in your stocks have changed—as when one of the companies whose stock you own is going bankrupt. Then, get out, preferably on days when the market is up, and accept your losses. Otherwise, accept your paper losses and don't look at the market until it hits bottom and begins to rise again.
Investing Wisely
This is a difficult course to take. But it is highly profitable. You wind up buying low and selling high. This is gold. The market professional dreams of market bottoms. It is the only opportunity to make obscene riches. He/she is grateful for market tops too, because this is when he/she can take the profits he/she has made from earlier buying when the market was low.
What to Do Now
What does that mean for today's miserable situation? If you have discretionary funds you can spare to put into the market now, you are very lucky. Start now buying quality companies on their way down. The more the market falls, the more you will buy. Don't count on any quick turnaround—if this is a true bear market, the market might not turn for years. If you can afford to lose some money, buy aggressive stocks. If you want to be more conservative, start buying defensive stocks. If you are stuck in positions, don't panic. Ride out the market drop and don't even look at it. Just make sure that the companies whose stock you have bought are quality companies. If they aren't any more, then sell them when you get a chance on up days in the market.
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Market Crash?
Is this a market crash, shades of '29? Probably not. Is it the beginning of a bear market? Probably not. It's most likely a correction in a continuing bull market, but this doesn't matter. In truth, we don't know if this present market is in a correction, or a crash. If it's in a correction, then it will rise again in a few weeks or months. If it's a bear market or a crash, then it will continue to fall. Whatever happens, it shouldn't concern us. We need to be brave, and stick with a long-term strategy that is appropriate in either case. This will lead to prosperity, whether the market rises or falls.
Other Strategies
Of course, there are other tactics to deal with a market crash, like selling short, or selling covered calls, but these are for the professionals. If you have a trusted broker, you can ask him/her about these, realizing that they are risky.
Good Luck
That's it. Easier said than done. Best of luck to you.
Rock
(*Wikipedia is always my source unless indicated.)
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Isn't this whole stock market crash thing related to global warming somehow? -Just kidding...
ReplyDeleteHi paz,
ReplyDeleteI think you're right. My theory about global warming is that it is directly caused by the increasing amount of hot air coming out of the mouths of politicians from both parties. What do you think?
Rock
One thing is to invest for the long run, very few make it rich in a short run at the markets. For short term riches, I invest a few dollars each week in the lottery.
ReplyDeleteSgt Dub, great to hear from you. Wise words. My "lottery" is writing screenplays, hoping one day to "hit."
ReplyDeleteGood luck with your lottery tickets, and stay safe.
Rock
"My theory about global warming is that it is directly caused by the increasing amount of hot air coming out of the mouths of politicians from both parties."
ReplyDeleteLove it!
sounds like great advice to me! since we are retired now we are trying to NOT spend our savings and just live on the income. so far so good, but i sure do like those big cruise ships! ha ha (especially when they are filled with grandchildren!!)
ReplyDeletesmiles, bee
Hello Mr Rock, I bought my first stock in 1977, have seen lots of ups and downs, in the long term the stock market out performs the lottery, FYI.
ReplyDeleteDitto's on global warming.
Empress Bee and Sarge Charlie, nice to hear from you. You guys sound like you got it right, Congratulations.
ReplyDeleteKeep on doing what you're doing.
Rock