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Editors Picks Bear Market Survival Tip
Editors Picks Bear Market Survival Tip 
Market Watch
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By Andrew Mickey Chief Invest Investment Strategist, Q1 Publishing The financial world didn’t get its relief yesterday. The bailout plan and any accompanying reprieve just weren’t in the cards. The Dow tumbled and investors rushed to the exits. I’m not going to harp on the bad news again, I’m sure you’ve heard it all by now. That’s because opportunity is knocking right now. |
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| Bear Market Survival Tip |
| Thursday, 24 January 2008 | ||||||||
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What a week! The Fed made the biggest emergency cut in history. Congress is set to pump a $150 billion into the U.S. economy. And still, it’s not enough to get the markets turned around. So what’s the future hold for the markets? Well, I’ve got to be honest; it’s probably not going to be a good few months. I’ll explain the most important reason why, but we’ll also look at one thing you can be doing now to protect yourself as well as remain positioned to profit from the rebound (because, let’s not forget, there always is one… eventually). The real reason the markets are going to get weaker is a lot simpler than most people think. Sure we have all these economists, quant analysts and technical chartists (a lot of really smart people) telling us why the markets have fallen and why they’re going to go lower. We hear things like the markets have broken through previous support levels; the U.S. government is devaluing the dollar; traders are liquidating stocks and, in search of safety, buying gold. The lending crisis is worse than any of us thought. I’m sure you’ve been hearing the same things. Frankly, there are a lot reasons, but everyone is looking in hindsight. That’s fun and makes us all feel really smart, but it is absolutely pointless. I’m not trying to get on some high horse here, but looking back right now is a complete waste of time. It’s time to look forward. We’ve got to get back to the basics. Now is the time to ask yourself the most basic questions: - What is my time horizon? - How much more downside am I willing to take? - Where will be the biggest opportunities going forward? - How much money can I save if I sell my favorite stocks now and buy them back over? And that’s why I want to focus on the final question: How much money can be made by dumping everything and buying everything back at a later date? Let’s forget the emotions for a second and look at the hard numbers. Let’s say the worst-case scenario is one of the big banks finally falls apart and the markets drop another 20%. That’s about as bad as it’s going to get. So overall, you could be facing another 20% loss from here (that would put the Dow around 9,000). So, if you sell everything and buy back when it’s cheaper, you could save 20% in losses. (That’s assuming there are no commissions, either.) For simplicity’s sake, let’s say your broker charges 2% of the trade to buy and sell. So your maximum savings could be 16%. Of course, that’s assuming one more very, very important thing: You call the exact bottom of the market. But, come on; that’s probably not going to happen. With hard work, continuous analysis, and rational thought we’ll be able to get within five or so percent of the bottom. So, let’s say the ultimate savings you could have is about 11%. Granted, 11% is a pretty good chunk of money, but you’re risking the opportunity to get back in the upside as the markets rebound. So, we have an 11% short-term win at the cost of risking 10%, 20% or 30% on the way back up.
It’s all about the opportunity cost. Finally, my best advice is to turn off CNBC. Please, just don’t watch it. There is some value there, but you’re just not going to get much actionable information. Sit back, think, research, learn, figure out, develop a plan… That’s what successful investors are doing right now. Over the past few weeks, I’ve had the opportunity to spend a lot of quality time with some of the most successful investors in the world. You know, the type of people that are able to absorb some pretty big losses in exchange for the big payoff that may be as long as three to five years away. They are willing to stomach an early loss for the big payoff at the end of the road. We can learn something from most of these people. They are some of the leading investment bankers of the world and they’re looking for one thing -- value. While the markets are still in full-on fear mode, we’ll see a lot of takeovers. Market players with cash are going to buy up as much as they can. There is value out there. Don’t panic, stop and think. Sleep on every decision, and you will be rewarded. Most millionaires are made in bear markets. Good investing, Andrew Source : Fear and Greed This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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